TELLABS INC (Form: 10-K, Filing Date:...

Business AddressONE TELLABS CENTER1415 WEST DIEHL ROADNAPERVILLE IL 60563630-378-8800

Mailing AddressONE TELLABS CENTER1415 WEST DIEHL ROADNAPERVILLE IL 60563

SECURITIES AND EXCHANGE COMMISSION

FORM 10-KAnnual report pursuant to section 13 and 15(d)

Filing Date: 2002-03-22 | Period of Report: 2001-12-28SEC Accession No. 0000317771-02-000037

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FILERTELLABS INCCIK:317771| IRS No.: 363831568 | State of Incorp.:DE | Fiscal Year End: 1231Type: 10-K | Act: 34 | File No.: 000-09692 | Film No.: 02583204SIC: 3661 Telephone & telegraph apparatus

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K(Mark One)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file Number: 0-9692

TELLABS, INC.(Exact name of registrant as specified in its charter)

Delaware 36-3831568(State or other jurisdictionof incorporation or organization)

(I.R.S. EmployerIdentification No.)

One Tellabs Center, 1415 West Diehl Road,Naperville, Illinois 60563

(Address of Principal Executive Offices) (Zip Code)

Registrant�s telephone number, including area code: (630) 378-8800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:Common shares, with $0.01 par value

(Title of Class)

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. YES [ X ] NO[ ]



On February 25, 2002, 410,673,829 common shares of Tellabs, Inc., were outstanding, and the aggregate market value (based upon theclosing sale price of the National Market System) of such shares held by nonaffiliates was approximately $4,689,895,127.

Documents incorporated by reference: Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 28,2001, are incorporated by reference into Parts I and II, and portions of the registrant's Proxy Statement dated March 19, 2002, are incorporatedby reference into Part III.

PART I

ITEM I. BUSINESS

Tellabs, Inc. designs, manufactures, markets and services optical networking, broadband access and voice-quality enhancement solutions. TheCompany also provides professional services that support its solutions. Tellabs� products and services are used worldwide by the providers ofcommunications services. Industry and technical terms used in this Form 10-K are described in the Glossary, which appears at the end of thisItem I.

In February 2001, the Company completed its acquisition of Future Networks, Inc. (FNI), a leader in standards-based voice and data cablemodem technology, for $141.8 million in cash and options. The transaction was accounted for as a purchase.

In April 2001, August 2001 and November 2001, the Company�s management and Board of Directors approved plans to restructure itsbusiness operations. The Company�s restructuring efforts included termination of the SALIX and NetCore next-generation switching efforts,discontinuation of the development of the TITAN 6700 Optical Transport Switch, a strategic realignment of worldwide manufacturingcapacity and related workforce reductions, reduction of excess inventories and related purchase commitments, and a consolidation of theCompany�s facilities. These steps were undertaken to both realign the Company�s cost structure with the lower anticipated business andindustry outlook and to focus the Company�s resources on the metropolitan optical networking and business services markets. As a result, theCompany recorded restructuring and other charges of $448.7 million ($321.6 million, after-tax, or $0.79 per diluted share). For moreinformation on the Company�s 2001 restructuring activities, please refer to Note 3, �Restructuring and Other Charges� from the Tellabs 2001Annual Report, incorporated herein by reference in Item 8, �Financial Statements and Supplementary Data.�

In January 2002, the Company completed its acquisition of Ocular Networks, Inc. (Ocular), a leader in next-generation optical solutions forthe metropolitan market, for approximately $355 million in cash and options. The transaction was accounted for a purchase.

Also in early 2002, the Company unified its product names under the Tellabs brand to make its product portfolio easier to communicate andunderstand. All product references in this Form 10-K, will refer to both the existing and new product names.

Products provided by Tellabs include optical networking systems, broadband access systems and voice-quality enhancement systems. Opticalnetworking systems include the Tellabs® 5000 (formerly TITAN®) series of digital cross-connects, the new Tellabs 6400 (formerly OcularOSXTM) product line, the Tellabs 6500 (formerly TITAN 6500) product line and the Tellabs 7000 (formerly TITAN 6100) series of opticaltransport systems. Broadband access systems include the Tellabs 2000 (formerly CABLESPAN®) telephony distribution system; the Tellabs6300 (formerly FOCUSTM) transport switching products and the Tellabs 8000 (formerly MartisDXX®) series of managed access systems.Voice-quality enhancement products include the Tellabs 3000 (formerly VERITYTM) series of echo control and cancellation products andTellabs Integrated Voice Products (OEM) such as its echo canceller mezzanine cards. Please refer to the glossary for an explanation oftechnical terminology.

Products recently introduced or to be introduced include the Tellabs 6400 Transport Switch (formerly Ocular OSX 6000TM), the Tellabs 6410Transport Edge Node (formerly Ocular OSX 1000TM), the Tellabs 6500 Transport Switch (formerly the TITAN 6500 Multiservice TransportSwitch), the Tellabs 7100 Optical Transport System (formerly the TITAN 6100 Optical Transport System) and the Tellabs 3000 (formerlyVERITY 3000) voice-quality enhancement series.

The Company�s products are sold in the domestic and international marketplaces (under the Tellabs name and trademarks and under privatelabels) through the Company�s field sales force and selected distributors to a major customer base. This base includes Incumbent LocalExchange Carriers (ILECs), independent telephone companies (ITCs), interexchange carriers (IXCs), local telephone administrations (PTTs),other local exchange carriers (LECs), original equipment manufacturers (OEMs), cellular and other wireless service companies, cableoperators, alternate service providers, competitive local exchange carriers (CLECs), internet service providers, system integrators, governmentagencies, and business end-users ranging from small businesses to Fortune 500 companies.

OPTICAL NETWORKING SYSTEMS



Optical networking increases the capacity of the fiber in a network, enabling service providers to carry more of their customers� voice, dataand video signals over the same infrastructure, which ultimately lowers costs. Optical networking relies on wavelengths and fibers to movemassive amounts of voice and data. A wavelength can carry voice, video or data traffic, from an optical carrier (OC)-3 or synchronous transfermode (STM)-1 (up to two million simultaneous phone conversations or Internet connections) up to OC-768 or STM-256. A fiber can carryanywhere from one to 160 wavelengths, depending on the type of equipment used to terminate the fiber.

Tellabs� optical networking systems are designed to help service providers lower costs, generate more revenues and efficiently managebandwidth as the end-user demand for communication services grows. The Company�s optical networking systems consist of technologicallysophisticated digital cross-connect, transport switching and optical transport systems. These transmission systems are designed to meet orexceed domestic and international industry standards. Product offerings include the Tellabs 5000 (formerly TITAN) series of digital-crossconnect systems, the new Tellabs 6400 (formerly Ocular OSX) product line, the Tellabs 6500 Transport Switch (formerly TITAN 6500Multiservice Transport Switch) and the Tellabs 7100 (formerly TITAN 6100) series of optical transport systems.

A digital cross-connect system is a high-speed data channel switch, which connects transmission paths based on network needs, rather thancall-by-call. Digital cross-connect systems manage and route network traffic and combine, consolidate and segregate signals to maximizeefficiency. The Tellabs 5000 (formerly TITAN) series of digital cross-connect systems operate under software control and are typically usedto build and control the narrowband and wideband transmission infrastructure of telecommunication service providers. These productsaugment the ability of users to provide current, emerging, and future service to business and residential customers.

Telecommunication managers utilize the digital cross-connect systems to generate revenue or to reduce cycle time while minimizing capitaland operating expense. Key applications include centralized and remote testing of transmission facilities, grooming of voice, data, and videosignals, automated provisioning of new services and restoration of failed facilities. All of the Company�s systems include a feature formonitoring facility performance, which reduces troubleshooting time in a complex network. The user can detect the early warnings of facilitydegradation rather than reacting to a network outage. These systems also convert international to domestic transmission and signalingstandards.

The Tellabs 5000 series digital cross-connect systems vary in switching rate and facility interface speed. The Tellabs5300 (formerly the TITAN 5300) line of narrowband cross-connect systems can process data through the system at upto 1.5 megabits per second (Mbps). The Company�s flagship Tellabs 5500 Digital Cross-Connect (formerly theTITAN 5500 Digital Cross-Connect) system, the industry�s largest wideband cross-connect can handle up to 155Mbps of data at a time. A single Tellabs 5500 system can carry the equivalent of 1,400,000 simultaneous Internetcalls.

The Tellabs 6500 Transport Switch aggregates traffic of different types; such as, synchronous optical network (SONET)/synchronous digitalhierarchy (SDH), asynchronous transfer mode (ATM), and Internet protocol/multiprotocol label switching (IP/MPLS), and routes it into asingle large optical pipe. The Tellabs 6500 interfaces electrical facilities at DS3 and STS-1 levels and optical facilities at OC-3, -12, -48 and-192, and switches lower speed signals at broadband payloads (52 MS/S - STS-1 through OC-48C (2.5 gigbits per second). The first release ofthe Tellabs 6500 system can carry the equivalent of 4,128,768 simultaneous Internet calls.

The Tellabs 7100 Optical Transport System is designed for use in the metropolitan (metro) optical networking market, to allow serviceproviders to deliver high-speed broadband services to Internet service providers and Fortune 500 companies, thus helping to alleviate thebandwidth bottlenecks of the Internet �on ramps.� The system accomplishes this by utilizing dense-wavelength-division multiplexing(DWDM) technology to increase the capacity of a network. DWDM is the process of increasing the amount of traffic a single fiber can carryby packing multiple signals onto it. The Tellabs 7100 system utilizes DWDM to increase an individual fiber�s capacity up to 32 times andwhen used in conjunction with other Tellabs solutions, allows end-to-end fiber and lightpath management.

The new Tellabs 6400 product line, obtained in the acquisition of Ocular Networks, Inc. in January 2002, is alsodesigned for use in the metro optical networking market. The Tellabs 6400 Transport Switch increases networkutilization efficiency in Tier 2 and Tier 3 offices by integrating cross-connect technology, add-drop multiplexing andhighly efficient data switching for Internet protocol (IP) and Ethernet traffic. The Tellabs 6410 Transport Edge Node isa compact, low-cost full SONET add/drop multiplexer system for time division multiplex (TDM) access and dataservices. By combining TDM and Ethernet interfaces with high-speed optical or electrical transport, carriers canachieve a cost-effective solution to link the new edge of the metro network with the dense metro core.

Optical networking system products accounted for approximately 55%, 64% and 59% of sales for 2001, 2000 and 1999, respectively.

BROADBAND ACCESS



The Company�s broadband access systems consist primarily of the Tellabs 8100 (formerly MartisDXX) and Tellabs 6300 (formerly FOCUS)series of managed access and transport systems, the Tellabs 7200 (formerly FOCUS 6200) Optical Transport System and the Tellabs 2000(formerly CABLESPAN) family of telephony distribution systems. The Company�s broadband access solutions provide seamless integrationof: circuit-switched voice and data; IP-data and voice-over-Internet protocol (VolP) services; and access capacity expansion through digitalsubscriber line (DSL) technology.

The Tellabs 8000 (formerly MartisDXX) series of managed access systems is designed for the connectivity services segment of the overallbusiness services market, which includes business-class Internet connectivity and managed data networks. The Tellabs 8100 Managed AccessSystem is currently deployed in more than 200 networks and 80 countries worldwide, providing intelligent transport for mobile services andmulti-service platforms for a broad range of business services. It is a leading mobile transmission system. Tellabs has partnered with Ericssonin this area, which puts the Company in a unique position to participate in 3G business. The long-term view is to migrate towards managed IPbased platforms both in the business service networks and mobile 3G networks. In 2001, the Tellabs 8100 Managed Access System wasupgraded with new integrated IP routing and ATM transport capabilities, which enable operators to reduce the cost of LAN-IC connectivityservice with integrated access devices and to utilize the ATM backbone networks for business service network transport and switchingservices. In addition, the Company also introduced full V5.2 implementation for multi-service access networks, to allow operators to utilizetheir business service coverage and enhance their service offerings with POTS and ISDN voice services.

The Tellabs 7200 Optical Transport System (formerly FOCUS 6200) is an international-oriented wavelength-division multiplexing platform,which enables operators to reduce the operational costs and simplify network planning. It provides multi-wavelength optical add/drop,integrated SDH interfaces, and open transponder interfaces that support multiple bit rates and IP applications for distances in excess of 600kilometers. For the end customer, direct SDH access means highly flexible, high-capacity connections for a range of services that can bemanaged end-to-end by the operator. For the operator, the benefits are improved bandwidth utilization with unified management of multipleservices over a single platform, using a range of transmission media.

The Tellabs 6300 series includes the Tellabs 6340 Transport Switch (formerly FOCUS LX), a flexible and scalable platform for add-dropmultiplexing, and the Tellabs 6350 Transport Switch (formerly FOCUS LX-XC), a multipurpose platform offering faster services, including4/4/1 cross-connection with interfaces to support both data and SDH.

The Tellabs 2300 Telephony Distribution System (formerly CABLESPAN 2300 Universal Telephony Distribution System) is a multipleservices delivery system that allows cable television providers, alternate access carriers, and competitive access providers to build flexiblecommunication networks that support the integrated delivery of video, voice, data and information services. The product provides maximumapplication flexibility through its ability to support a wide variety of network topologies, interface with various forms of transmission mediaand provide the modularity required to support both residential and business customers. The Tellabs 2000 series telephony distributionsystems can be managed either directly from an integral interface that provides local and remote management or from a PC-based stand-aloneelement management system that allows the management of multiple Tellabs 2000 systems and supports multiple network operators whileinterfacing with other operational support systems. Tellabs has partnered with TollBridge Technologies, Inc. in this area, with a strategy ofglobal expansion. The Company has also enhanced the Tellabs 2300 Telephony Distribution System to reduce telephony upgrade costs by asmuch as 30% in cable networks and improve service reliability.

In 2001, Tellabs, Inc. acquired Future Networks, a leader in standards-based voice and data cable modem technology. This enabled Tellabs toprovide cable operators with a multi-services solution based on internet protocol. Future Networks brought a complete line of cable datamodems based on Data Over Cable Service Interface Specification (DOCSIS), EuroDOCSIS and PacketCable specifications to Tellabs� end-to-end solution.

Broadband Access products accounted for approximately 24% of sales in 2001 and 22% of sales in 2000 and 1999.

VOICE-QUALITY ENHANCEMENTS

The Company�s voice-quality enhancement systems consist primarily of the Tellabs 3000 (formerly VERITY) familyof broadband and narrowband echo cancellers and Tellabs Voice-Quality Enhancement (VQE) solutions that enablewireless and wireline providers to improve voice quality in long distance, wireless and private networks.

The Tellabs 3000 series of echo cancellers operate in a variety of network environments to ensure that a subscriber�s phone call is echo free.The VQE solutions are application-specific software that operate seamlessly with the Tellabs 3000 family of echo cancellers to optimize voiceclarity for improved customer satisfaction. Tellabs VQE products primarily address the needs of cellular companies, ILEC�s and IXC�s, bothdomestically and internationally.

In the case of wireline customers, the ability to control the clarity of speech quality is becoming more and more difficult, due to thederegulation of networks and the move from circuit-based to cell and packet-based networks. These networks introduce delays and otherissues that are not present in circuit-based calls, including the level of speech signals during calls. In the case of wireless operators, to competewith wireline operators for call revenues, the clarity of a mobile call must be as good as a wireline call. These changes have resulted in a move



away from pure echo cancellation, to providing echo cancellation as a platform for voice-quality enhancing software, such as level control andnoise reduction. This development in the market has opened up opportunities, not just to provide solutions to the wireline and wirelessoperators worldwide, but also to the manufacturers of telecommunications products worldwide, who integrate these voice-quality enhancingsolutions into their products. Competition is driving many wireline and wireless customers to re-evaluate and upgrade their existinginfrastructure, based on the voice enhancing technology solutions now available. Tellabs VQE solutions include Tellabs Noise Reduction(TNR), which reduces background noise in mobile calls; Tellabs Level Control (TLC), which addresses voice level variations byautomatically compensating for high or low audio levels on a cell-by-cell basis; and Tellabs Acoustic Control (TAC), which eliminatesacoustic echo originating from digital mobile handsets and hands-free kits.

In 2001, the Company introduced the Tellabs 3100S VQE system, which combines an echo canceller and a fully functional digital cross-connect, along with optional voice-quality enhancements to offer digital wireless and long distance service providers improved voice qualityand enhanced network performance. The Tellabs 3100S system will be available during the first quarter of 2002.

Voice quality enhancement products accounted for approximately 6% of sales in 2001, 6% of sales in 2000, and 12% of sales in 1999.

COMPETITION

The Company�s products are sold in global markets and compete on the following key factors: responsiveness to customer needs, productfeatures, customer-oriented planning, price, performance, reliability, breadth of product line, technical documentation and prompt delivery.

The optical networking product systems compete principally with Alcatel, Ciena, Cisco, ECI, Fujitsu, Lucent Technologies, Nortel Networks,ONI, Siemens and Sycamore.

The major competitors of the broadband access products are ADC, Alcatel, Arris, Cisco, Lucent, Marconi, Motorola, Nortel Networks,Samsung, Thompson/RCA and Toshiba.

Leading competitors for voice-quality enhancements are Ditech, Ericsson and NMS Communications.

SERVICES AND OTHER

The Company generates services and other revenues primarily from its services and solutions area. The purpose of the Company�s worldwideservice organization is to provide customers with high quality technical and administrative product support focusing on meeting the expandingneeds of the global customer base. The Company supports its customers with a wide range of services, including: network deployment, trafficmanagement, support services and professional services.

The Company�s application engineering, support and installation group emphasizes meeting the customer�s needs for installation andintegration of the Company�s products and third party equipment into the customer�s network. The group uses a combined workforce ofCompany and subcontracted personnel to provide teams of trained professionals that manage the job from the conceptual, engineering stagethrough to the successful system integration and commissioning.

The Company�s technical support group consists of unique and highly-trained teams that focus on customer support of all of the Company�sexisting and emerging products. All teams utilize a Customer Management System (CMS) to capture, collect and report on a number of datapoints specific to product performance and overall customer profiles as well as tracking the status of customer calls through to resolution.

The Company�s customer training group offers an expansive choice of course offerings designed to meet the existing customer needs, as wellas, newly-designed course offerings that address the rapidly changing industry needs. Courses are offered at the Company�s technologically-advanced training facilities and on-site at customer premises.

The Company provides product warranties for periods ranging from one to five years for the repair or replacement of modules and systemsfound to be faulty due to defective material and additionally for other requirements as described in the customer contract. The Company hasan expedited replacement service that is used to provide the customer with needed module replacements in response to a time-critical serviceoutage.

The Company�s solutions services group offers a variety of professional and consultative services, including program management, networkplanning and enhanced product support. These innovative service offerings are designed to augment the Company�s basic services andprovide value-added benefits to our customers.

Services and other revenues accounted for approximately 15%, 8% and 6% of sales in 2001, 2000 and 1999, respectively.

GLOBAL SALES



Sales are generated through the Company�s direct sales organization and selected distributors. The North American sales group consists ofapproximately 90 direct sales personnel and an additional 60 sales support personnel located throughout the United States and Canada. Theinternational sales group consists of approximately 110 direct sales personnel, and an additional 100 sales support personnel located in LatinAmerica, South America, Europe, the Middle East, Africa and Asia.

The North American sales organization conducts its activities from the Company�s corporate headquarters and five regional offices. Theinternational sales organization conducts its activities from the Company�s corporate headquarters, 26 regional sales offices, and threeregional headquarters. The regional sales offices are generally staffed by a regional sales manager or country manager, direct sales resources,system sales engineers and additional personnel as required.

Direct orders through the Company�s field organization accounted for approximately 89% of 2001 U.S. sales. The North American salesorganization is structured by market with emphasis on large customers. The international sales organization is structured to support activitieson a regional basis, with �solution centers� located strategically throughout the world.

The Company has arrangements with a number of distributors of telecommunications equipment, both in North America and internationally,some of whom maintain inventories of the Company�s products to facilitate prompt delivery. These distributors provide information on theCompany�s products through their catalogs and through trade show demonstrations. The Company�s field sales force also assists thedistributors with regular calls to them and their customers. Distributors, as a group, accounted for approximately 15% of overall 2001 sales.

CUSTOMERS

Sales to customers within the United States accounted for approximately 76%, 78% and 70% of overall sales, in 2001, 2000, and 1999,respectively. Sales to international customers accounted for approximately 24%, 22% and 30% of consolidated sales in 2001, 2000 and 1999,respectively. The largest single group of customers the Company has is Incumbent Local Exchange Carriers (ILECs), which accounted forapproximately 47%, 38% and 34% of consolidated net sales in 2001, 2000 and 1999, respectively. The Company believes that a loss of, or asignificant reduction in purchases by ILECs as a group, although not anticipated, could have a material adverse effect on the Company�sresults. In 2001, sales to Verizon Communications, Inc. (Verizon) and Sprint Corporation (Sprint) accounted for approximately 18.4% and10.1% of consolidated net sales, respectively. In 2000, sales to Verizon accounted for approximately 19.1% of consolidated net sales. In 1999,sales to SBC Communications, Inc. (SBC) and sales to Verizon accounted for approximately 11.5% and 11.0% of consolidated net sales,respectively. No other customer in 2001, 2000, or 1999 accounted for more than 10% of consolidated net sales.

BACKLOG

At December 28, 2001, and December 29, 2000, backlogs were approximately $172 million and $436 million, respectively. All of theDecember 28, 2001, backlog is expected to be shipped in 2002. The Company considers backlog to be an indicator, but not the sole predictor,of future sales.

RESEARCH AND DEVELOPMENT

Tellabs believes that the enhancement of existing products and the development of new products are vital to the Company�s long-termsuccess. Research and development expenses were $425.5 million in 2001, $415.2 million in 2000, and $312.3 million in 1999. As ofDecember 28, 2001, there were approximately 2,675 engineers employed at Tellabs, representing approximately 36% of the Company�s totalworkforce. The Company conducts research at its laboratories in Lisle, Bolingbrook and Naperville, Illinois; Mishawaka, Indiana; Hawthorne,New York; Burlington, Bedford, and Cambridge, Massachusetts; Ashburn and Reston, Virginia; Alpharetta, Georgia; Ontario and Quebec,Canada; Ballerup, Denmark; Espoo, Oulu, Varkaus and Tampere, Finland; Haryana, India; and Shannon, Ireland. In addition to theCompany�s internal efforts to develop new technologies, Tellabs also undertakes research and development-oriented acquisitions and product-oriented alliances in order to allow the Company access to technology that is important to the future of its products. The Company plans tospend approximately $400 million on research and development in 2002. These expenditures reflect the Company�s commitment to theenhancement of existing products and development of new products designed to satisfy the needs of communications service providersworldwide.

MANUFACTURING

The Company generally manufactures and assembles the products it sells. These products are primarily assembled from standard componentsand from fabricated parts that are manufactured by others to the Company�s specifications.

Most purchased items are standard commercial components available from a number of suppliers with only a few items procured from asingle-source vendor. Management believes that alternate sources could be developed for those parts and components of proprietary designand those available only from single or limited sources. However, future shortages could result in production delays that could adverselyaffect the Company�s business.



The Company�s manufacturing facilities are located in Bolingbrook, Illinois; Espoo, Finland; Shannon, Ireland; and Ronkonkoma, New York.Each of the Company�s manufacturing operations is registered under the ISO 9000 standard.

As part of the manufacturing process, hazardous waste materials that are present are handled and disposed of in compliance with all Federal,State and local provisions. These waste materials and their disposal have no significant impact on either the Company�s production process orits earnings or capital expenditures.

EMPLOYEES

At December 28, 2001, the Company had 7,334 employees, of which 2,251 were employed in the sales, sales support and marketing area,2,675 in product development, 1,794 in manufacturing, and 614 in administration. The Company considers its employee relations to be good.It is not a party to any collective bargaining agreement.

INTELLECTUAL PROPERTY

The Company has various trade and service marks, both registered and unregistered, in the U.S. and in numerous foreign countries(collectively, �Marks�). All of these Marks are important in that they differentiate the Company�s products and services within the industrythrough brand name recognition. The Company is not aware of any factor which would affect its ability to utilize any of its major Marks.

The Company currently holds numerous United States and foreign patents. The Company has also developed certain proprietary hardwaredesigns, software programs, and other works in which the Company owns various intellectual property rights, including rights under copyrightand trade secret laws. The Company believes that its patents and other intellectual property rights are important to its business.

Through various licensing arrangements the Company grants certain rights to its intellectual property and receives certain rights to intellectualproperty of others. The Company expects to maintain current licensing arrangements and in the future secure licensing arrangements, asneeded and to the extent available on reasonable terms and conditions, to support continued development and marketing of the Company�sproducts. Some of such licensing arrangements require or may require the payment of royalties, and the amount of such payments may dependupon various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use ofthe licensed technology in any products of the Company or otherwise.

BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION

The Company manages its business in one business segment. Information with respect to the Company�s net sales by product group, net salesby country and net long-lived assets by country for the fiscal years ended December 28, 2001, December 29, 2000, and December 31, 1999, isset forth in Note 11 on page 47 of the registrant�s 2001 Annual Report to Stockholders and is incorporated herein by reference.

GLOSSARY OF COMMUNICATIONS TERMS

Access �� The process by which users or devices interact with a communications network.Add/drop �� In a multichannel transmission system, a process that diverts (drops) a portion of the multiplexed aggregate signal at anintermediate point, and introduces (adds) a different signal for subsequent transmission in the same position.Asynchronous transfer mode (ATM) �� A high-speed multiplexing and switching method utilizing fixed-length cells of 53 octects to supportmultiple types of traffic.Bandwidth �� The width or carrying capacity of a communications channel.Branch �� A direct path joining two nodes of a network or graph.Broadband �� A network element, fiber-optic in nature, providing capacity at DS3 or greater (e.g., Tellabs 6500).Carrier �� In a telecommunications context, a telecommunications company that holds itself out to the public for hire to providecommunications transmission services.Channel �� A connection between initiating and terminating nodes of a circuit.Circuit �� The complete path between two terminals over which one-way or two-way communications may be provided.Connection �� A provision for a signal to propagate from one point to another, such as from one circuit, line, subassembly, or component toanother.Dense wavelength division multiplexing (DWDM) �� Technology that splits single white-light optical signals on fiberoptic cables intoseveral independent wavelengths, or colors, thus expanding the carrying capacity of fiber optic networks.Digital �� An alternative to traditional analog communications, digital systems transport information in binary 1s and 0s format, like computercode, to improve clarity and quality.Digital cross-connect �� A specialized high-speed data channel switch, which connects transmission paths based on network needs (rather thancall by call). Digital cross-connects manage and route network traffic, and combine, consolidate and segregate signals to maximize efficiency.Digital signal �� A signal in which discrete steps are used to represent information.Digital signal 3 (DS3) �� A digital signal of 44.736 Mb/s, corresponding to the North American T3 designator.Ethernet �� A data network that connects computers, printers, workstations, terminals and servers within the same building, campus ormetropolitan area.



Exchange �� In the telephone industry, a geographic area (such as a city and its environs) established by a regulated telephone company for theprovision of local telephone services.Fiber optic �� High-capacity cable that uses a laser beam of light traveling along a glass fiber to transmit communication signals.Frequency �� For a periodic function, the number of cycles or events per unit time.Interexchange carrier (IXC) �� A communications common carrier that provides telecommunications services between local exchange andtransport areas (LATAs) or between exchanges within the same LATA.Internet �� The world�s largest decentralized network of computers and network servers.Internet protocol (IP) �� Common name given to a set of protocols developed to allow cooperating computers to share resources across anetwork.Multiplexing �� The combining of two or more information channels onto a common transmission medium.Multiservice �� The capability of simultaneously transporting a variety of signal types.Narrowband �� A network element providing capacity from DS0 to DS1.Network �� A system of equipment and connections for the transmission of signals that carry voice, data and video. Networks can be local,such as those maintained by providers of local telephone services, or long-distance, such as those maintained by providers of connections andtransport between local networks.Node �� In a switched network, one of the switches forming the high-traffic-density connectivity portion of any communications network.OC �� Optical Carrier.Optical �� A technology that transmits signals as light over fiber optic cable.Packet �� In data communications, a sequence of binary units, including data and control signals, that is transmitted and switched on acomposite whole.Signal �� Detectable transmitted energy that can be used to carry information.Switch �� A device that establishes and routes communications paths.Switching �� The controlling or routing of signals in circuits to execute logical or arithmetic operations or to transit data between specificpoints in a network.Switched network �� A communications network in which any user may be connected to any other user through the use of message, circuit orpacket switching and control devices.Synchronous digital hierarchy (SDH)�� Transport format for transmitting digital information over fiberoptic facilities outside of NorthAmerica, comparable to SONET.Synchronous optical network (SONET) �� Transport format for sending high-speed signals over fiberoptics in North America.Traffic �� The information moved over a communications channel.Transponder �� An automatic device that receives, amplifies, and retransmits a signal on a different frequency.Transmission �� The dispatching, for reception elsewhere, of a signal, message, or other form of information.Terminal �� A device capable of sending, receiving or sending and receiving information over a communications channel.Transport �� Refers to networks that use cables rather than radio.Voice-quality enhancement �� A technique that isolates and filters our unwanted signals such as echo and background noise.Wideband �� A network element providing capacity at DS1 or greater.

ITEM 2. PROPERTIES

In late 2001, the Company began relocating its corporate headquarters to a new 850,000 square foot facility built on 55 acres of land theCompany owns in Naperville, Illinois, approximately 35 miles west of Chicago.

The Company continues to own 19.1 acres of land with three buildings totaling 222,000 square feet in Lisle, Illinois. The Company also owns50 acres of land in Bolingbrook, Illinois (near Lisle), where a 544,000-square foot manufacturing, engineering and office building is located.In addition, the Company owns another 182,000 square foot building in Bolingbrook used by manufacturing. In Round Rock, Texas, theCompany owns approximately 76 acres of land where a 124,000 square foot manufacturing facility is located. This facility was closed as partof the Company�s 2001 restructuring efforts. In 1999 the Company purchased 5.2 acres of land in Ashburn, Virginia adjoining their existingleased facility.

Internationally, the Company owns a 222,000-square foot facility on 28 acres of land in Ballerup, Denmark, which houses administrative andresearch and development functions. In Espoo, Finland, the Company owns a 154,000-square foot production and engineering facility, locatedon approximately 12 acres of Company-owned land. Also on this land is a 90,000-square foot building, which is used for manufacturing. TheCompany also owns three office buildings in Espoo, totaling 132,000 square feet, which contain production, research and development andadministrative functions. In Shannon, Ireland, the Company owns a 135,000-square foot manufacturing facility, which is built on landobtained through a long-term lease entered into during 1997.

Significant facilities leased by the Company include: a manufacturing facility in Ronkonkoma, New York (130,000 square feet); one locationin Burlington, Massachusetts (60,000 square feet), which contains sales, research, manufacturing and administrative activities; a facility inAshburn, Virginia (72,000 square feet) for research and development; a location in Alpharetta, Georgia (25,500 square feet) for research anddevelopment; two locations in Espoo, Finland (60,000 square feet, total) housing administrative and engineering functions; and two locationsin Oulu and Tampere, Finland (59,000 square feet, total) for research and development.



In addition to these facilities, the Company also leases six sales offices and three research and development facilities in the United States. InCanada, the Company leases one sales office and two research and development facilities. Internationally, the Company also leases fiveresearch and development facilities and various small sales offices in twenty-seven countries.

During 2001, the Company consolidated its facilities as part of its restructuring efforts. As a result, the Company currently has certainlocations available for sublease. These locations include: Bolingbrook, Illinois (54,000 square feet); Lisle (93,000 square feet); Warrenville,Illinois (137,000 square feet); Schaumburg, Illinois (12,700 square feet); Germantown, Maryland (94,000 square feet); Chelmsford,Massachusetts (260,000 square feet); Drogheda, Ireland (122,000 square feet); and Wilmington, Massachusetts (77,000 square feet).

The Company owns substantially all the equipment used in its business. The Company believes that its facilities are adequate for the level ofproduction anticipated in 2002, and that suitable additional space and equipment will be available to accommodate expansion as needed.

ITEM 3. LEGAL PROCEEDINGS

The Company is not involved in any material litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

FORWARD LOOKING STATEMENTS

Except for historical information, the matters discussed or incorporated by reference in Part I of this report may include forward-lookingstatements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements reflect management�s expectations, estimates and assumptions, based on theinformation available at the time the document was prepared. These forward-looking statements include, but are not limited to, statementsregarding future events, plans, goals, objectives and expectations. The words �anticipate,� �believe,� �estimate,� �expect,� �plan,� �intend,��likely,� �will,� �should� and similar expressions are intended to identify forward-looking statements. Forward-looking statements are notguarantees of future performance and involve risks, uncertainties and other factors which may cause our actual performance or achievementsto be materially different from any future results, performance or achievements expressed or implied by those statements. Important factorsthat could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economicchanges impacting the telecommunications industry; new product acceptance; product demand and industry capacity; competitive productsand pricing; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents andtechnology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment; facilityconstruction and start-ups; the regulatory and trade environment; availability and terms of business partnering arrangements and futureacquisitions; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions; and otherrisks and future factors that may be detailed from time to time in the Company�s filings with the SEC. For a further description of such risksand future factors, see Exhibit 99.1 to Form 10-Q for the quarterly period ended June 29, 2001, filed with SEC on August 9, 2001. TheCompany�s actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoingrisks, uncertainties and other factors, investors should not place undue reliance on the forward looking statements in determining whether tobuy, sell or hold any of the Company�s securities. The Company undertakes no obligation to publicly update or revise any forward-lookingstatements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. Theforegoing discussion should be read in conjunction with the financial statements and related notes and management�s discussion and analysisincluded in the Company�s Annual Report and incorporated in this report by reference in Part II, Items 7 and 8 herein.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name and Business Experience Year of Birth Current Position

Michael J. BirckChairman and Director; Chief Executive Officer, President andDirector 1975 to 2000.

1938 Chairman and Director.

Thomas F. CookeSenior Vice President, Human Resources; Director,Employment Law and Compliance 2000 to 2001; Labor and

1959 Senior Vice President, HumanResources.



Employment Counsel, SBC Communications 1998 to 2000;Partner, Baker & Hostetler 1987 to 1998.

James A. DiteVice President and Controller; Director of Taxes 1997 to 2000. 1946 Vice President and Controller.

Anders GustafssonPresident, Global Sales and Executive Vice President; VicePresident and General Manager, Europe, Middle East andAfrica 2000; Various senior sales and management positions,Motorola 1992 to 2000.

1960 President, Global Sales and ExecutiveVice President.

John C. KohlerSenior Vice President, Global Business Operations; VicePresident, Global Manufacturing 1998 to 2000; Vice President,Manufacturing 1993 to 1998.

1952 Senior Vice President, Global BusinessOperations.

Catherine E. KozikChief Information Officer and Senior Vice President, GlobalInformation Services; Various management positions,information technology and engineering 1992 to 2000.

1960Chief Information Officer and SeniorVice President, Global InformationServices.

Susan LichtensteinSenior Vice President, General Counsel and Secretary; SeniorVice President, General Counsel and Secretary, Ameritech1999 to 2001; Various positions, Ameritech 1994 to 1999.

1956 Senior Vice President, General Counseland Secretary.

Stephen M. McCarthySenior Vice President, Global Marketing; Vice President,Global Solutions and Service 1999 to 2000; Senior VicePresident, Major Accounts Central Division, ADP 1997 to1999; Vice President, Sales, Ameritech 1994 to 1997.

1954 Senior Vice President, GlobalMarketing.

Richard C. NotebaertChief Executive Officer, President and Director; Chairman andChief Executive Officer, Ameritech 1994 to 1999.

1947Chief Executive Officer, President andDirector.

Joan E. RyanExecutive Vice President and Chief Financial Officer; Senior 1956 Executive Vice President and Chief

Financial Officer.



Vice President, Chief Financial Officer, Alliant Foodservice,Inc. 1998 to 2000; Vice President, Finance and Chief FinancialOfficer, Ameritech Small Business Services 1995 to 1998.

PART II

ITEM 5. MARKET FOR REGISTRANT��S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Tellabs� common stock is listed on the Nasdaq Stock market under the symbol TLAB and appears daily in most newspaper stock tables asTellabs. As of February 25, 2002, there were approximately 5,845 stockholders of record and 410,673,829 outstanding shares. Tellabs is acomponent of the Nasdaq-100 Index and the Standard & Poor�s 500 Index.

The section entitled "Common Stock Market Data" on the inside back cover of the Company�s Annual Report to Stockholders for the yearended December 28, 2001 (the �Annual Report�) is incorporated herein by reference. It is also included in Exhibit 13, as filed with the SEC.See discussion referred to in Item 7 below for dividend information.

ITEM 6. SELECTED FINANCIAL DATA

Five-Year Summary of Selected Financial Data

(In millions, except per-share amounts) 2001* 2000 1999 1998 1997

Net Sales $2,199.7 $3,387.4 $2,322.4 $1,706.1 $1,280.9

Gross Profit $763.2 $1,835.4 $1,382.3 $1,000.0 $761.3

Operating Profit (Loss)$(279.4) $995.0 $731.8 $484.4 $379.8

Earnings (Loss) Before Income Taxes andCumulative Effect of Change in AccountingPrinciple $(244.8) $1,109.4 $802.1 $577.7 $417.2

Earnings (Loss) Before Cumulative Effect ofChange in Accounting Principle $(182.0) $760.0 $549.7 $391.5 $275.5

Net Earnings (Loss) $(182.0) $730.8 $549.7 $391.5 $275.5

Earnings (Loss) per Share Before CumulativeEffect of Change in Accounting Principle $(0.44) $1.86 $1.36 $0.98 $0.71

Effect of Change in Accounting Principle,Assuming Dilution $(0.44) $1.82 $1.32 $0.96 $0.69



Earnings (Loss) per Share $(0.44) $1.79 $1.36 $0.98 $0.71

Earnings (Loss) per Share, Assuming Dilution $(0.44) $1.75 $1.32 $0.96 $0.69

Total assets $2,865.8 $3,073.1 $2,354.6 $1,651.9 $1,250.1

Total Liabilities $400.2 $445.5 $307.1 $247.4 $257.9

Stockholders� Equity $2,465.6 $2,627.6 $2,047.5 $1,404.5 $992.2

Long-Term debt $3.4 $2.9 $9.4 $3.3 $3.1

Net Working Capital $1,625.1 $1,910.1 $1,511.4 $1,054.9 $685.0

No cash dividends per common share were paid. Per-share amounts restated for stock split in 1999.*Includes restructuring and other charges of $448.7 million ($321.6 million, after-tax, or $0.79 per diluted share).

ITEM 7. MANAGEMENT��S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management�s Discussion and Analysis of Financial Condition and Results of Operations on pages 22 through 30 of the Annual Reportare incorporated herein by reference. This information is also included in Exhibit 13, as filed with the SEC.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investments in marketable securitiesDuring the normal course of business, the Company invests a portion of its cash and cash equivalents in marketable securities. The Companyaccounts for these investments using the guidance in Statement of Financial Accounting Standards (SFAS) No. 115, �Accounting for CertainInvestments in Debt and Equity Securities� and its related interpretive guidance. All securities in the Company�s short-term marketablesecurities portfolio are considered available-for-sale securities and are marked-to-market on a monthly basis with the resulting unrealizedgains and losses, net of deferred taxes, reported as a separate component of stockholders� equity.

In accordance with SFAS No. 115, when the Company determines that a decline in the fair value of a security is other than temporary, theCompany will record an impairment loss to adjust the security to its new, lower market value. In assessing whether a decline in market valuefor a security is considered other than temporary, the Company examines a variety of factors, including: current and anticipated macro-economic conditions, the outlook for the particular industry, the long-term business outlook for the investee, the amount of time theinvestment�s fair value has been below cost and the Company�s liquidation strategy with respect to the particular investment.

At December 28, 2001, and December 29, 2000, they consisted of the following:

(In millions)Amortized

CostUnrealizedGain/(Loss) Market Value

2001State and municipal securities $ 135.9 $ 1.8 $ 137.7Preferred and common stocks 93.7 2.6 96.3U.S. government and agency debt obligations 65.9 2.1 68.0Corporate debt obligations 55.8 0.7 56.5Foreign bank obligations 41.3 (0.1) 41.2

$ 392.6 $ 7.1 $ 399.72000State and municipal securities $ 278.6 $ (1.6) $ 277.0Preferred and common stocks 147.3 (4.7) 142.6U.S. government and agency debt obligations 118.1 (0.5) 117.6Corporate debt obligations 103.7 0.3 104.0



Foreign bank obligations 51.4 0.5 51.9$ 699.1 $ (6.0) $ 693.1

The Company�s preferred and common stock portfolio consists of investments in preferred securities of various public companies andgovernmental agencies, investments in mutual funds that invested in preferred stock holdings and investments in common shares of publiclytraded technology companies. During 2001, the Company determined that the decline in market value it had experienced in certain preferredand common stock holdings was other than temporary in nature. As a result, the Company recognized a pre-tax loss totaling $25.9 millionrelated to the impairment and subsequent sale of these investments. Also during 2001, the Company also sold stock of a certain equityinvestment for a pre-tax gain of $12.8 million. In 2000, the Company sold stock in this same investment, of which approximately 40 percentwas covered by various market price collars, for a pre-tax gain of $39.8 million. Also in 2000, the Company recognized a pre-tax gain of$13.2 million from distributions from certain of its technology investments.

Other investmentsThe Company also maintains investments in start-up technology companies and partnerships that invest in start-up technology companies.These investments are recorded in Other Assets at cost, which approximates fair market value. At December 28, 2001, and December 29,2000, these investments totaled $36.0 million and $34.7 million, respectively.

Accounts receivableThrough the normal course of business, the Company markets its products to various telecommunications service providers (For a discussionof the Company�s customers, see "Customers" in Part I of this Form 10-K). Sales to these customers have varying degrees of collection riskassociated with them, depending on a variety of factors. The Company increased its reserve for uncollectable accounts $29.7 million, net ofreceivable write-offs of approximately $12.3 million, due to the downturn in the telecommunications industry and the overall weakness in theUnited States economy during 2001.

Purchase commitmentsThe Company, through its normal course of business, enters into a variety of non-cancelable, non-returnable commitments for the purchase ofinventory piece parts. These commitments are entered into at market rates and expire within the next year. In the event of a dramatic decline insales, such as was experienced in 2001, the Company may incur excess inventory and subsequent losses as a result of these commitments.During 2001, the Company accrued $127.0 million related to outstanding purchase commitments as part of its restructuring actions. TheCompany does not anticipate having to recognize any material losses on these contracts during 2002.

Financial InstrumentsThe Company conducts business on a global basis in several major currencies and is subject to the risks associated with fluctuating foreignexchange rates. In response to this, the Company developed a foreign currency exposure management policy with the objective of mitigatingfinancial exposure to changing foreign exchange rates resulting from nonfunctional currency receivables and payables that are expected to besettled in one year or less. The Company utilizes derivatives, primarily foreign currency forward contracts, to manage its foreign currencyexposure. The Company does not engage in hedging specific individual transactions, but rather uses derivatives to manage overall exposurelevels for a specific currency. Gains and losses related to these derivatives are recorded to the consolidated statement of operations eachmonth.

The Company�s policy is to hedge 90% of the calculated exposure. Foreign currency forward contracts are executed weekly with the finalcontracts for each period executed one week before the end of the period. As a result of this timing additional nonfunctional foreign currencytransactions can occur during the last week of the period that could cause the Company�s hedge percentage at the end of the period to begreater or less than the 90% target. The Company enters into forward exchange contracts only to the extent necessary to meet its overall goalof minimizing nonfunctional foreign currency exposures. The Company does not enter into hedging transactions for speculative purposes. TheCompany�s foreign currency exposure management policy and program remained unchanged during 1999, 2000 and 2001, and no significantchanges are currently planned.

In accordance with SFAS No. 133, all forward exchange contracts are recorded on the balance sheet at fair value. Forward exchange contractsreceivable are included in other current assets, while forward exchange contracts payable are included as part of accrued liabilities in theconsolidated condensed balance sheet. Changes in the fair value of these instruments are included in earnings, as part of �Other income(expense),� in the current period. Net losses on forward exchange contracts were $4,652,000, $1,826,000 and $5,889,000 for 2001, 2000 and1999, respectively. The Company�s current hedging practices do not qualify for special hedge accounting treatment as prescribed in SFASNo. 133 since hedges of existing assets or liabilities that will be remeasured with changes in fair value reported currently in earnings arespecifically excluded.

Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk thatresults from these instruments relates to changes in the foreign currency exchange rates, which is expected to be partially offset by movementsin the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the Company�sderivative transactions. The Company does not believe there is a significant credit risk because the counterparties are all large internationalfinancial institutions with high credit ratings. In addition, the Company also limits the amount of agreements entered into with any onefinancial institution in order to mitigate credit risk.



The table that follows presents a summary of the Company�s underlying foreign currency exposure, along with the notional and fair values ofthe related foreign currency forward contracts being utilized at December 28, 2001 and December 29, 2000. The principal currencies currentlybeing hedged by the Company are the British pound, Danish krone, Euro and U.S. dollar. The notional amounts shown are the U.S dollarvalues of the agreed-upon amounts in each foreign currency that will be delivered to a third party on the agreed-upon date.

(Dollars in millions)

UnderlyingExposure at12/28/01

Notional Value ofForward ContractMaturing in 2002

AverageContract Rate

Fair Value ofForward Contractat 12/28/01

Forward contracts at 12/28/01:Forward contracts to sell foreigncurrencies for Euro:United States dollar $73.8 $68.3 0.8877 $68.3Danish krone 8.0 7.3 7.4385 7.2Norwegian krone 2.7 2.3 8.0145 2.2British pound 2.4 2.0 1.5798 1.9Swedish krone 0.3 0.3 8.8765 0.3Thai baht 6.2 5.4 40.2600 5.5&nbsp $93.4 $85.6 $85.4Forward contracts to buy foreigncurrencies for Euro:Japanese yen $0.9 $0.5 114.4635 $0.5&nbsp $0.9 $0.5 &nbsp $0.5Forward contracts to sell foreigncurrencies for Danish krone:United States dollar $7.4 $6.9 8.3262 $6.9&nbsp $7.4 $6.9 &nbsp $6.9Forward contracts to sell foreigncurrencies for British pound:Euro $14.6 $10.0 0.6078 $10.0&nbsp $14.6 $10.0 &nbsp $10.0Forward contracts to buy foreigncurrencies for US dollar:British pound $0.4 $0.2 1.4458 $0.2&nbsp $0.4 $0.2 &nbsp $0.2Forward contracts to sell foreigncurrencies for US dollar:Canadian dollar $5.6 $5.8 0.6337 $5.7Euro 1.5 1.3 0.8801 1.3&nbsp $7.1 $7.1 &nbsp $7.0Total contracts outstanding atDecember 28, 2001: $123.8 $110.3 &nbsp $110.0

(Dollars in millions)


Notional Value ofForward ContractMaturing in 2001

AverageContract Rate

Fair Value ofForward Contractat 12/29/00

Forward contracts at 12/29/00:Forward contracts to sell foreigncurrencies for Euro:United States dollar $84.0 $81.0 0.9309 $81.0Danish krone 13.9 21.7 0.7961 21.7Norwegian krone 4.7 3.7 0.7189 3.7British pound 8.1 5.5 1.6005 5.6Swiss franc 0.7 0.6 3.8986 0.6&nbsp $111.4 $112.5 $112.6Forward contracts to sell foreigncurrencies for Danish krone:United States dollar $10.3 $7.0 8.0138 $7.0Norwegian krone 5.7 4.7 0.9027 4.7



&nbsp $16.0 $11.7 $11.7Forward contracts to sell foreigncurrencies for British pound:United States dollar $0.8 $0.7 1.4934 $0.7Euro 2.8 2.4 0.6223 2.4&nbsp $3.6 $3.1 $3.1Forward contracts to sell foreigncurrencies for US dollar:Canadian dollar $8.7 $7.2 0.6634 $7.2Singapore dollar 0.3 0.3 0.5786 0.3Euro 2.6 3.7 0.9284 3.7&nbsp $11.6 $11.2 &nbsp $11.2Total contracts outstanding atDecember 29, 2000: $142.6 $138.5 &nbsp $138.6

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Notes and the Report of Independent Auditors on pages 31 through 49 of the Annual Report areincorporated herein by reference. They are also included in Exhibit 13, as filed with the SEC.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required, except for information relating to the executive officers of the registrant which appears at the end of Part I above, isincorporated herein by reference to the section entitled "Election of Directors" in the registrant�s Proxy Statement (the "Proxy Statement")dated March 19, 2002.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Security Ownership of Management and Certain Other Beneficial Owners" in the Proxy Statement is incorporated hereinby reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section entitled "Election of Directors" in the Proxy Statement is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

The following Consolidated Financial Statements of Tellabs, Inc., and Subsidiaries, included in the registrant�s Annual Report toStockholders for the year ended December 28, 2001, were previously incorporated by reference in Item 8:

Report of Independent Auditors

Consolidated Balance Sheets: December 28, 2001, and December 29, 2000

Consolidated Statements of Operations: Years ended December 28, 2001, December 29, 2000, and December 31, 1999

Consolidated Statements of Stockholders� Equity: Years ended December 28, 2001, December 29, 2000, and December 31, 1999



Consolidated Statements of Cash Flows: Years ended December 28, 2001, December 29, 2000, and December 31, 1999

Notes to Consolidated Financial Statements

2. Financial Statement Schedules:

The following Consolidated Financial Statement Schedules of Tellabs, Inc., and Subsidiaries are included herein pursuant to Item 14(d):

Report of Independent Auditors on Financial Statement Schedule

Schedule II. Valuation and Qualifying Accounts and Reserves

Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated FinancialStatements or Notes thereto.

(b) Reports on Form 8-K:

The Registrant filed a press release on October 18, 2001, announcing earnings for the quarter and nine months ended September 28, 2001.

The Registrant filed a press release on November 5, 2001, announcing its plans to discontinue its development of the TITAN 6700 opticalswitch and reallocate resources to the development of the TITAN 6100 metro DWDM platform.

The Registrant filed a press release on November 16, 2001, announcing its plans to reduce its work force by about 1,000 people.

The Registrant filed a press release on December 4, 2001, announcing that it will acquire Ocular Networks, Inc.

The Registrant filed a press release on January 28, 2002, announcing earnings for the quarter and year ended December 28, 2001.

(c) Exhibits:

Exhibit Number Description

2.1 Agreement and Plan of Merger Among Tellabs, Inc., Blackhawk Merger Co. and NetCore Systems,Inc. 12/

2.2 Agreement and Plan of Merger Among Tellabs, Inc., Oriole Merger Corp. and SALIX Technologies,Inc. 13/

2.3 Agreement and Plan of Merger Among Tellabs, Inc., Omaha Merger Corp. and Future Networks, Inc.20/

2.4 Agreement and Plan of Merger Among Tellabs, Inc., Orbit Merger Sub, Inc. and Ocular Networks,Inc.

3.1 Restated Certificate of Incorporation 5/

3.2 Amended and Restated By-Laws, as amended 19/

3.3 Certificate of Amendment to Restated Certificate of Incorporation 8/

3.4 Certificate of Amendment to Restated Certificate of Incorporation 17/



4Upon request of the Securities and Exchange Commission, registrant hereby agrees to furnish to theCommission copies of instruments (not filed) defining the rights of holders of long-term debt of theCompany. (This undertaking is in lieu of a separate exhibit.)

10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its related trust, as amended 6/

10.2 Tellabs Operations, Inc. Deferred Income Plan Amendment 20/

10.3 1981 Incentive Stock Option Plan, as amended and restated 1/

10.4 Amendment to Tellabs, Inc. 1981 Incentive Stock Option Plan 17/

10.5 1984 Incentive Stock Option Plan, as amended and restated 1/

10.6 Amendment to Tellabs, Inc. 1984 Incentive Stock Option Plan (As Amended and Restated June 26,1992) 17/

10.7 Amendment to the Coherent Communications Systems Corporation Amended and Restated StockOption Plan 17/

10.8 1986 Non-Qualified Stock Option Plan, as amended and restated 1/

10.9 Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June26, 1992) 17/

10.10 1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated 1/

10.11 Amendment to Tellabs, Inc. 1987 Stock Option Plan for Non-Employee Corporate Directors (AsAmended and Restated June 26, 1992) 17/

10.12 1989 Stock Option Plan, as amended and restated 1/

10.13 Amendment to Tellabs, Inc. 1989 Stock Option Plan (As Amended and Restated June 26, 1992) 17/

10.14 Employee Quality Stock Award Program 2/

10.15 Form of Employment Agreement 3/

10.16 1991 Stock Option Plan, as amended and restated 1/

10.17 Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 17/



10.18 Description of Split-Dollar Insurance Arrangement with the Michael J. Birck Irrevocable Trust 3/

10.19 Amendment to the Coherent Communications Systems Corporation Amended and Restated 1993Equity Compensation Plan 17/

10.20 1994 Stock Option Plan 4/

10.21 Amendment to the Tellabs, Inc. 1994 Stock Option Plan 17/

10.22 Tellabs, Inc. Stock Bonus Plan for Former Employees of Steinbrecher Corporation 7/

10.23 Tellabs, Inc. Stock Bonus Plan for Former Employees of TRANSYS Networks Inc. 9/

10.24 Tellabs, Inc. Stock Bonus Plan for Former Employees of International Business MachinesCorporation 9/


10.26 1998 Stock Option Plan 10/


10.28 Tellabs, Inc. Stock Bonus Plan for Former Employees of Switched Network Technologies, Inc. 11/

10.29 NetCore Systems, Inc. 1997 Stock Option Plan 14/

10.30 Tellabs Advantage Program 16/

10.31 1999 Tellabs, Inc. Stock Bonus Plan 16/

10.32 SALIX Technologies, Inc. 1998 Omnibus Stock Plan and Option Agreement Dated as of December1, 1997 15/

10.33 Amendment to the SALIX Technologies, Inc. Omnibus Stock Plan 17/

10.34 Employment Agreement - Chairman of the Board 18/

10.35 Employment Agreement - President and Chief Executive Officer 18/

10.36 Future Networks, Inc. Stock Incentive Plan 19/

10.37 Amendment to the Coherent Communications Systems Corporation 1993 Equity Compensation Plan21/



10.38 Tellabs, Inc. 2001 Stock Option Plan 21/10.39 Change in Control Agreement for Corporate Officers 22/10.40 Change in Control Agreement for Senior Executives 22/10.41 Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 23/10.42 Tellabs Advantage Plan, as amended and restated

13 Annual Report to Stockholders

21 Subsidiaries of Tellabs, Inc.

23 Consent of Ernst & Young LLP

99.1 Forward-Looking Statements and Risks and Future Factors Impacting Tellabs 22/

Exhibits 10.1 through 10.42 are management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form10-K pursuant to Item 14(c) hereof.

(d) Schedules: See Item 14(a)2 above.

1/ Incorporated by reference from Tellabs, Inc. Post-effective Amendment No. 1 on Form S-8 to Form S-4 filed onor about June 29, 1992 (File No. 33-45788).

2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 1, 1988 (File No. 0-9692).

3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1993 (File No. 0-9692).

4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1993 (File No. 0-9692).

5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 1995 (File No. 0-9692).

6/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 1995 and Form 10-Q QuarterlyReport for the quarter ended September 26, 1997. The Deferred Income Plan Amendment is incorporated by reference from Tellabs, Inc.Form 10-K Annual Report for the year ended January 1, 1999 (File No. 0-9692).


8/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 27, 1997 (File No 0-9692).


10/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed on or about March 16, 1998 (File No. 0-9692).

11/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1999 (File No. 0-9692).

12/ Incorporated by reference from Tellabs, Inc. Pre-Effective Amendment No. 1 to Form S-4, filed on August 5, 1999 (File No. 33-83509).

13/ Incorporated by reference from Tellabs, Inc. Pre-Effective Amendment No. 1 to Form S-4, filed on February 7, 2000 (File No. 33-95135).

14/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No.1,on Form S-8 to Form S-4, filed on September 17, 1999 (FileNo. 33-83509).

15/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on March 13, 2000 (FileNo. 33-95135).





18/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 29, 2000 (File No. 0-9692).

19/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on March 5, 2001 (File No. 333-56546).


21/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 30, 2001 (File No. 0-9692).


23/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on January 25, 2002 (File No. 333-81360).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

TELLABS, INC.

March 22, 2002Date

By /s Richard C. NotebaertRichard C. NotebaertPresident and Chief Executive Officer(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

/s Michael J. BirckMichael J. BirckChairman and Director

March 22, 2002

/s Richard C. NotebaertRichard C. NotebaertPresident, Chief Executive Officer and Director

March 22, 2002

/s Joan E. RyanJoan E. RyanExecutive Vice President and Chief Financial Officer(Principal Financial Officer)

March 22, 2002

/s James A. DiteJames A. DiteVice President and Controller(Principal Accounting Officer)

March 22, 2002



/s John J. GoossensJohn J. GoossensDirector

March 22, 2002

/s Peter A. GuglielmiPeter A. GuglielmiDirector

March 22, 2002

/s Brian J. JackmanBrian J. JackmanDirector

March 22, 2002

/s Frederick A. KrehbielFrederick A. KrehbielDirector

March 22, 2002

/s Stephanie Pace MarshallStephanie Pace MarshallDirector

March 22, 2002

/s William F. SoudersWilliam F. SoudersDirector

March 22, 2002

/s Jan H. SuwinskiJan H. SuwinskiDirector

March 22, 2002

REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Tellabs, Inc.

We have audited the consolidated financial statements of Tellabs, Inc. and Subsidiaries as of December 28, 2001, and December 29, 2000, andfor each of the three years in the period ended December 28, 2001, and have issued our report thereon dated January 22, 2002. Our audits alsoincluded the financial statement schedule listed in the Index at Item 14(a). This schedule is the responsibility of the Company�s management.Our responsibility is to express an opinion based on that schedule.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as awhole, presents fairly in all material respects the information set forth therein.

/s Ernst & Young LLP

Ernst & Young LLPChicago, IllinoisJanuary 22, 2002



TELLABS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Three Years Ended December 28, 2001, December 29, 2000 and December 31, 1999

(In Millions)Balance at beginning ofyear

Additions charged tocosts and expenses Deductions (A) Balance at end of year

2001Allowance for doubtfulreceivables $27.6 $42.0 $12.3 $57.3



NOTE:

(A) - uncollectable accounts charged off, net

Exhibit Index

2.4 Agreement and Plan of Merger Among Tellabs, Inc., Orbit Merger Sub, Inc. and Ocular Networks, Inc.10.42 Tellabs Advantage Plan, as amended and restated13 Annual Report to Stockholders21 Subsidiaries of Tellabs, Inc.23 Consent of Ernst & Young LLP



EXECUTION COPY

Agreement And Plan of Merger

Among

Tellabs, Inc.

Orbit Merger Sub, Inc.

And

Ocular Networks, Inc.



Dated as of November 29, 2001

TABLE OF CONTENTS

Page

Introduction 1

ARTICLE I The Merger 1SECTION 1.1 General 1SECTION 1.2 Certificate of Incorporation 2SECTION 1.3 The By-Laws 2SECTION 1.4 Board of Directors and Officers 2SECTION 1.5 Conversion of Securities 2SECTION 1.6 Dissenting Shares 4

SECTION 1.7 Exchange Procedures; Distributions with Respect to Unexchanged Shares; Stock TransferBooks 4

SECTION 1.8 Return of Exchange Fund 6SECTION 1.9 No Further Ownership Rights in Company Capital Stock 6SECTION 1.10 Further Assurances 6

ARTICLE II Representations and Warranties of the Company 7SECTION 2.1 Organization and Qualification 7SECTION 2.2 Certificate of Incorporation and Bylaws 7SECTION 2.3 Capitalization 7SECTION 2.4 Authority 8SECTION 2.5 No Conflict; Required Filings and Consents 8SECTION 2.6 Financial Statements 9SECTION 2.7 Absence of Certain Changes or Events 9SECTION 2.8 Ownership and Condition of the Assets 10SECTION 2.9 Leases 10SECTION 2.10 Other Agreements 11SECTION 2.11 Real Property 12SECTION 2.12 Environmental Matters& 13SECTION 2.13 Litigation 13SECTION 2.14 Compliance with Laws 14SECTION 2.15 Intellectual Property 14SECTION 2.16 Taxes and Assessments 16



SECTION 2.17 Employment and Benefit Matters 17(a) Pension and Benefit Plans and Other Arrangements 17(b) Compliance 17(c) Collective Bargaining Agreements 18(d) Employee Information 18(e) Employment Practices 18(f) Contributions to the Company Benefit Plans 18(g) Immigration Laws 18

SECTION 2.18 Transactions with Related Parties 18SECTION 2.19 Insurance and List of Claims 19SECTION 2.20 Brokers 19SECTION 2.21 Disclosure 19

ARTICLE III Representations and Warranties of Parent 19SECTION 3.1 Organization and Qualification 19SECTION 3.2 Certificate of Incorporation and Bylaws 20SECTION 3.3 Authority 20SECTION 3.4 No Conflict; Required Filings and Consents 20SECTION 3.5 Brokers 20SECTION 3.6 SEC Filings 20SECTION 3.7 Absence of Certain Changes or Events 21

ARTICLE IV Representations and Warranties of Merger Sub 21SECTION 4.1 Organization and Qualification 21SECTION 4.2 Authority 21SECTION 4.3 No Conflict; Required Filings and Consents 22SECTION 4.4 No Prior Activities 22

ARTICLE V Conduct Pending Closing 22SECTION 5.1 Conduct of Business Pending Closing 22SECTION 5.2 Prohibited Actions Pending Closing 23SECTION 5.3 Access; Documents; Supplemental Information 25SECTION 5.4 No Solicitation 25SECTION 5.5 Stockholder Meeting 27SECTION 5.6 Filings; Other Actions; Notification 28SECTION 5.7 Information 28SECTION 5.8 NASDAQ Listing 28SECTION 5.9 Company Stock Options; Company Warrants 28SECTION 5.10 Notification of Certain Matters 29SECTION 5.11 Indemnification 30SECTION 5.12 Actions by the Parties 30SECTION 5.13 Interim Financing 31

ARTICLE VI Conditions Precedent 32SECTION 6.1 Conditions Precedent to Each Party�s Obligation to Effect the Merger 32



(a) Approvals 32(b) No Injunction 32(c) Stockholder Approval 32

SECTION 6.2 Conditions Precedent to Obligations of Parent 32(a) Performance of Obligations; Representations and Warranties 32(b) Consent 32(c) Termination of Agreements 33(d) Escrow Agreement 33(e) No Litigation or Injunction 33(f) FIRPTA Certificate 33(g) Capital Structure Certificate 33

SECTION 6.3 Conditions Precedent to the Company�s Obligations 33(a) Performance of Obligations; Representations and Warranties 33(b) Escrow Agreement 34

ARTICLE VII Survival of Representations and Warranties; Indemnification 34SECTION 7.1 Survival of Representations and Warranties 34SECTION 7.2 Indemnification; Escrow Agreements 34

(a) Indemnification 34(b) Indemnification Threshold and Limitations 34(c) Satisfaction of Indemnification Obligations; Escrow Fund 35

SECTION 7.3 Stockholders� Representatives 35(a) Appointment 35(b) Indemnification of Stockholders� Representatives 35(c) Access to Information 36(d) Reasonable Reliance 36(e) Attorney-in-Fact 36(f) Liability 37(g) Orders 37

(h) Removal of Stockholders� Representatives; Authority of Successor Stockholders�Representatives 37

SECTION 7.4 Defense of Third Party Claims 38

ARTICLE VIII Miscellaneous and General 39SECTION 8.1 Public Announcements 39SECTION 8.2 Contents of Agreement; Parties in Interest; Etc 39SECTION 8.3 Assignment and Binding Effect 39SECTION 8.4 Termination 39

(a) Termination by Mutual Consent 39(b) Termination by Either Parent or the Company 39(c) Termination by the Company 40(d) Termination by Parent 40(e) Effect of Termination and Abandonment 40

SECTION 8.5 Definitions 41SECTION 8.6 Notices 44SECTION 8.7 Amendment 45



SECTION 8.8 Governing Law 45SECTION 8.9 No Benefit to Others 45SECTION 8.10 Severability 45SECTION 8.11 Section Headings 46SECTION 8.12 Schedules and Exhibits 46SECTION 8.13 Extensions 46SECTION 8.14 Counterparts 46SECTION 8.15 Enforcement 46

Agreement and Plan of Merger (this �Agreement�), dated as of November 29, 2001, by and among Tellabs, Inc.,a Delaware corporation (�Parent�), Orbit Merger Sub, Inc., a Delaware corporation (�Merger Sub�), and OcularNetworks, Inc., a Delaware corporation (the �Company�).

Introduction

The Boards of Directors of each of Parent, Merger Sub and the Company have determined that the merger of MergerSub with and into the Company (the �Merger�)in accordance with the provisions of the Delaware General CorporationLaw, as amended (the �DGCL�), and subject to the terms and conditions of this Agreement, is advisable and in the bestinterests of Parent, Merger Sub and the Company and their respective stockholders.

The Company is a Delaware corporation and has authorized 40,000,000 shares of common stock, par value $0.001 pershare (�Company Common Stock�), and 13,500,000 shares of preferred stock, $0.01 par value per share (�CompanyPreferred Stock�), of which 5,506,573 shares have been designated Series A Preferred Stock (�Series A PreferredStock�) and 7,993,427 shares have been designated Series B Preferred Stock (�Series B Preferred Stock� and togetherwith the Series A Preferred Stock, the �Company Series Preferred Stock�, and the Company Preferred Stock and theCompany Common Stock are referred to as the �Company Capital Stock�).

Concurrently with this Agreement certain stockholders of the Company, including each of those who also is a directoror officer of the Company and persons affiliated with such persons, are entering into Stockholder Agreements withParent in the form attached hereto as Exhibit A, pursuant to which, among other things, each such stockholder agrees tovote in favor of adoption of this Agreement and the Merger.

In consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained inand other good and valuable consideration, the parties agree as follows:

ARTICLE I

The Merger

SECTION 1.1 General.

a. Subject to the terms and conditions of this Agreement and in accordance with the DGCL, at the EffectiveTime (i) Merger Sub shall be merged with and into the Company, (ii) the separate corporate existence ofMerger Sub shall cease and (iii) the Company shall be the surviving company (the �Surviving Company�) andshall continue its legal existence under the DGLC.

b. The Merger shall become effective at the time of filing of a Certificate of Merger with the Secretary of Stateof the State of Delaware in accordance with the provisions of Section 251 of the DGCL, or at such later timeas may be stated in the Certificate of Merger (the �Effective Time�). The closing of the Merger (the



�Closing�) shall take place at the offices of Covington & Burling, 1201 Pennsylvania Avenue, N.W.,Washington, DC 20004 at 10:00 A.M., two Business Days after the date on which the last of the conditions setforth in Article VI shall have been satisfied or waived, or on such other date, time and place as the Companyand Parent may mutually agree (the �Closing Date�).

c. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL.Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property,rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the SurvivingCompany, and all debts, liabilities, obligations, and duties of the Company and Merger Sub shall become thedebts, liabilities, obligations and duties of the Surviving Corporation.

SECTION 1.2 Certificate of Incorporation. The Certificate of Incorporation of the Company, as in effectimmediately prior to the Effective Time (the �Company Certificate�), shall be amended so that Article Fourth readsin its entirety as follows: �The total number of shares of all classes of capital stock which the Corporation shall haveauthority to issue is 1,000 shares of Common Stock, $.01 par value per share.� As so amended the Company Certificateshall be the Certificate of Incorporation of the Surviving Company, until thereafter amended as provided therein and bylaw.

SECTION 1.3 The By-Laws. The By-laws of the Merger Sub, as in effect immediately prior to the Effective Time,shall be adopted at the Effective Time as the By-laws of the Surviving Company, until thereafter amended as providedtherein and by law.

SECTION 1.4 Board of Directors and Officers. From and after the Effective Time, the Board of Directors andofficers of Merger Sub at the Effective Time shall be the Board of Directors and officers of the Surviving Company,each to hold office until his or her respective successors are duly elected or appointed and qualified.

SECTION 1.5 Conversion of Securities.

a. At the Effective Time, by virtue of the Merger and without any action on the part of the Company or theholders of the Company�s Capital Stock (the �Stockholders�):

i. Each share of common stock of Merger Sub issued and outstanding immediately prior to the EffectiveTime shall be converted into one share of common stock of the Surviving Company;

ii. Each share of Company Capital Stock held in the treasury of the Company and each share ofCompany Capital Stock owned by Parent shall be canceled without any conversion thereof and nopayment or distribution shall be made with respect thereto; and

iii. The then issued and outstanding shares of Company Capital Stock (on a fully diluted basis, assumingthe exercise of all options and warrants and conversion of all equity interests in the Company intoshares of Company Common Stock or Series B Preferred Stock, as the case may be) shall beconverted into the sum in cash of $355,000,000 (the �Aggregate Merger Consideration�) to bedistributed in accordance with this Section 1.5 and Section 1.8, without interest or dividends. Subjectto the provisions of Section 1.6, each share of Company Capital Stock issued and outstandingimmediately prior to the Effective Time (other than (A) shares canceled in accordance with Section1.5(a)(ii) and (B) Dissenting Shares) shall be converted as follows:

(A) Each such share of Company Common Stock and each such share of Series B Preferred Stock(in addition to the right to receive the amount specified in Section 1.5(a)(iii)(C)(1)) shall be converted into the right toreceive, in cash, without interest or dividends, an amount equal to the Post Preference Merger Consideration divided bythe aggregate of all then issued and outstanding shares of Company Common Stock, on a fully diluted basis, assumingthe exercise of all options and warrants and conversion of all equity interests in the Company into shares of Company



Common Stock other than the conversion of shares of Series A Preferred Stock; provided, however, that in the eventthat each share of Series B Preferred Stock would become entitled to greater than $17.70 per share pursuant to theconsideration allocable to the Series B Preferred Stock in accordance with this clause (A) together with the Series B PerShare Initial Liquidation Preference, then such shares of Series B Preferred Stock shall not be entitled to any paymentin excess of $17.70 out of the Post Preference Merger Consideration unless and until each share of Company CommonStock has become entitled to $17.70 hereunder, thereafter the Series Breferred Stock and the Company Common Stockshall receive ratably any remaining portion of the Post Preference Merger Consideration (the portion of such per shareconsideration allocable to the Series B Preferred Stock pursuant to this clause (A) being the �Series B ParticipatingPayment� and such per share consideration allocable to the Company Common Stock pursuant to this clause (A) beingthe �Common Per Share Consideration�).

(B) Each such share of Series A Preferred Stock shall be converted into the right to receive, in cashand without interest or dividends, $1.74 (the �Series A Per Share Consideration�).

(C) Each such share of Series B Preferred Stock shall be converted into the right to receive, in cashand without interest or dividends, (1) $7.08 (the �Series B Per Share Initial Liquidation Preference�) and (2) the SeriesB Participating Payment (collectively, the �Series B Per Share Consideration�).

For purposes of this Agreement, (i) the Post Preference Merger Consideration means the excess of (x) the AggregateMerger Consideration over (y) the aggregate cash amount payable pursuant to Sections 1.5(a)(iii)(B) and1.5(a)(iii)(C)(1); and (ii) the Common Stock Exchange Ratio shall mean the Common Per Share Consideration dividedby the average, rounded down to the nearest cent, of the last reported sales price per share of Parent Common Stock onthe Nasdaq National Market (�Nasdaq�) for the ten trading days immediately preceding the Effective Time.

In calculating the consideration payable under this Section 1.5, Parent shall be entitled to rely on the representationsand warranties contained in Section 2.3 and the certificate delivered pursuant to Section 6.2(g). If such representations,warranties and certificate are not correct, Parent shall have the right to adjust the Series A Per Share Consideration,the Series B Per Share Consideration and the Common Per Share Consideration and the Common Stock ExchangeRatio accordingly and, notwithstanding anything else to the contrary contained in this Agreement, in no event shall theaggregate merger consideration payable by Parent, Sub or the Surviving Corporation to the holders of equity interests inthe Company in connection with the Merger or the transactions contemplated hereby exceed such consideration payableassuming such representations, warranties and certificate are correct.

• After the Effective Time, all such shares of Company Capital Stock shall no longer be outstanding and shallautomatically be canceled and retired, and each holder of a certificate representing any such shares shall cease to haveany rights with respect thereto other than the right to receive the Common Per Share Consideration, the Series A PerShare Consideration or the Series B Per Share Consideration, as applicable, to be paid in consideration therefor uponthe surrender of such certificate.

SECTION 1.6 Dissenting Shares. Notwithstanding any provision of this Agreement to the contrary, shares ofCompany Capital Stock that are outstanding immediately prior to the Effective Time and which are held by stockholderswho shall not have voted in favor of the Merger or consented thereto in writing and who shall have demanded properlyin writing appraisal for such shares in accordance with Section 262 of the DGCL (collectively, the �Dissenting Shares�)shall not be converted into or represent the right to receive the consideration set forth in Section 1.5. Such stockholdersshall be entitled to receive such consideration as is determined to be due with respect to such Dissenting Shares inaccordance with the provisions of Section 262 of the DGCL, except that all Dissenting Shares held by stockholders whoshall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares underSection 262 of the DGCL shall thereupon be deemed to have been converted into and to have become exchangeablefor, as of the Effective Time, the right to receive the consideration specified in Section 1.5, without any interest thereon,upon surrender, in the manner provided in Section 1.7, of the certificate or certificates that formerly evidenced by such



Dissenting Shares less the cash allocable to such stockholder to be deposited in the Escrow Fund in respect of CompanyCapital Stock pursuant to Sections 1.7(b) and 7.2.

a. The Company shall give Parent (i) prompt notice of any demands for appraisal received by the Company,withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by theCompany and (ii) the opportunity to direct all negotiations and proceedings with respect to demands forappraisal under the DGCL. The Company shall not, except with the prior written consent of Parent, make anypayment with respect to any demands for appraisal or offer to settle or settle any such demands.

SECTION 1.7 Exchange Procedures; Distributions with Respect to Unexchanged Shares; Stock Transfer Books.

a. As of the Effective Time, Parent shall deposit with the Exchange Agent for the benefit of the holders of sharesof Company Capital Stock, cash in an amount sufficient to permit the payment of the Aggregate MergerConsideration into which shares of Company Capital Stock are converted (other than Dissenting Shares andother than with respect to options, warrants and restricted stock, the payout provisions of which are governedby Section 5.9) less the amount to be deposited with the Escrow Agent Pursuant to Section 7.2. (Such amountis referred to as the �Exchange Fund�).

b. As soon as practicable after the Effective Time, Parent shall cause the Exchange Agent to send to each Personwho was, at the Effective Time, a holder of record of certificates which represented outstanding CompanyCapital Stock (the �Certificates�) which shares were converted into the right to receive the consideration pershare specified in Section 1.5, a letter of transmittal which (i) shall specify that delivery shall be effected andrisk of loss and title to such Certificates shall pass, only upon actual delivery thereof to the Exchange Agentand (ii) shall contain instructions for use in effecting the surrender of the Certificates. Upon surrender to theExchange Agent of all Certificates held by a holder of Company Capital Stock for cancellation, together withsuch letter of transmittal duly executed, such holder shall be entitled to receive in exchange therefor cashequal to the product of (x) the applicable consideration per share specified in Section 1.5 and (y) the numberof shares of Company Capital Stock represented by the surrendered Certificate (less such holder�s pro rataportion of the cash to be deposited in the Escrow Fund on such holder�s behalf pursuant to Section 7.2), andthe Certificates so surrendered shall then be canceled. Until surrendered as contemplated by this Section1.7(b), each Certificate, from and after the Effective Time, shall be deemed to represent only the right toreceive, upon such surrender, the cash into which such Company Capital Stock shall have been converted. Assoon as practicable after the Effective Time, and subject to and in accordance with the provisions of Section7.2, Parent shall cause to be distributed to the Escrow Agent an amount of cash equal to 10% of the portion ofthe Aggregate Merger Consideration into which the outstanding shares of Company Capital Stock areconverted (other than Dissenting Shares) (the �Escrow Amount�). Such cash shall be held in escrow and shallbe available to settle certain contingencies as provided in the Escrow Agreement. To the extent not used forsuch purpose, such cash shall be released, as provided in the Escrow Agreement.

c. If any cash is to be issued or paid to any Person other than the registered holder of the Certificate surrenderedin exchange therefore, it shall be a condition to such exchange that such surrendered Certificate shall beproperly endorsed and otherwise in proper form for transfer and such Person either (i) shall pay to theExchange Agent any transfer or other taxes required as a result of the distribution of such cash payment tosuch Person or (ii) shall establish to the reasonable satisfaction of the Exchange Agent that such tax has beenpaid or is not applicable. Parent or the Exchange Agent shall be entitled to deduct and withhold from theconsideration otherwise payable pursuant to this Agreement such amounts as Parent or the Exchange Agentare required to deduct and withhold with respect to the making of such payment under the Code, or anyprovision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or theExchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having beenpaid to the Person in respect of which such deduction and withholding was made by Parent or the Exchange



Agent. All amounts in respect of taxes received or withheld by Parent shall be disposed of by Parent inaccordance with the Code or such state, local or foreign tax law, as applicable.

d. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by thePerson claiming such Certificate to be lost, stolen or destroyed and subject to such other conditions as theBoard of Directors of the Surviving Company may impose, the Surviving Company shall pay any cash inrespect of such Certificate to which the holder is entitled pursuant to Section 1.8. When authorizing paymentof any such cash) in exchange for such Certificate, the Board of Directors of the Surviving Company (or anyauthorized officer thereof) may, in its reasonable discretion and as a condition precedent to the issuancethereof, require the owner of such lost, stolen or destroyed Certificate to give the Surviving Company a bondin such sum as the Board of Directors may direct as indemnity against any claim that may be made against theEscrow Agent, Parent or the Surviving Company with respect to the Certificate alleged to have been lost,stolen or destroyed.

e. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be nofurther registration of transfers of shares of Company Capital Stock on the records of the Company. From andafter the Effective Time, the holders of shares of Company Capital Stock outstanding immediately prior to theEffective Time shall cease to have any rights with respect to such shares except as otherwise provided hereinor by applicable law.

SECTION 1.8 Return of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to theformer holders of Company Capital Stock for one year after the Effective Date shall be delivered to Parent, upon itsrequest, and any such former holders who have not theretofore surrendered to the Exchange Agent their Certificatesin compliance herewith shall thereafter look only to Parent for payment of their claim for cash in respect of suchCertificates. Neither Parent nor the Company shall be liable to any former holder of Company Capital Stock for anysuch cash held in the Exchange Fund which is delivered to a public official pursuant to an official request under anyapplicable abandoned property, escheat or similar law.

SECTION 1.9 No Further Ownership Rights in Company Capital Stock. All cash delivered upon the surrender forexchange of any Certificate in accordance with the terms hereof (including any cash paid pursuant to Section 1.7 orSection 1.8) shall be deemed to have been delivered (and paid) in full satisfaction of all rights pertaining to the CompanyCapital Stock previously represented by such Certificate.

SECTION 1.10 Further Assurances. If at any time after the Effective Time the Surviving Company shall consideror be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirableor proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Company, its right, title or interest in, toor under any of the rights, privileges, powers, franchises, properties or Assets of either the Company or Merger Sub or(b) otherwise to carry out the purposes of this Agreement, the Surviving Company and its proper officers and directorsor their designees shall be authorized to execute and deliver, in the name and on behalf of the Company, Merger Sub,all such deeds, bills of sale, assignments and assurances and do, in the name and on behalf of the Company or MergerSub, all such other acts and things necessary, desirable or proper to vest, perfect or confirm its right, title or interestin, to or under any of the rights, privileges, powers, franchises, properties or Assets of the Company or Merger Sub, asapplicable, and otherwise to carry out the purposes of this Agreement.

ARTICLE II

Representations and Warranties of the Company

SECTION 2.1 Organization and Qualification. The Company is a corporation duly organized, validly existingand in good standing under the laws of Delaware. The Company has the requisite power and authority to carry onits business as now being conducted and to perform the terms of this Agreement and the transactions contemplatedhereby. The Company is duly qualified to conduct its business, and is in good standing, in each jurisdiction in which



the ownership or leasing of its Assets or the nature of its activities in connection with the conduct of its business makessuch qualification necessary, except for those jurisdictions in which the failure to be so qualified and in good standingwould not have a Company Material Adverse Effect. The Company has no, and has never had any, Subsidiaries or anyequity interest in any Person.

SECTION 2.2 Certificate of Incorporation and Bylaws. The Company has delivered to Parent a complete andcorrect copy of the Company Certificate and the bylaws of the Company, each as amended to date. Such CompanyCertificate and bylaws are in full force and effect. The Company is not in violation of any of the provisions of theCompany Certificate or its bylaws.

SECTION 2.3 Capitalization. The authorized capital stock of the Company consists of 40,000,000 shares ofcommon stock, $0.001 par value per share, of which, 20,279,627 shares are issued and outstanding, and 13,500,000shares of preferred stock, par value $0.01 per share, of which 5,506,573 shares are designated as Series A PreferredStock, all of which are issued and outstanding, and 7,993,427 shares are designated as Series B Preferred Stock,5,350,195 of which are issued and outstanding. All of the issued and outstanding shares of Series A Preferred Stock,Series B Preferred Stock and Common Stock of the Company are owned of record by the Stockholders of theCompany shown on Schedule 2.3, which Schedule sets forth the number, class and series of such shares owned by eachStockholder. Except as set forth on Schedule 2.3, the Company has not granted any options, warrants or other rights, orentered into any agreements, arrangements or commitments of any character relating to the issued or unissued capitalstock of the Company, or obligating the Company to issue or sell any shares of capital stock of, or other equity interestsin the Company (�Equity Rights�), including any securities directly or indirectly convertible into or exercisable orexchangeable for any capital stock or other equity securities of the Company. Schedule 2.3 includes with respect toeach Equity Right, the name of the person holding it and the exercise price and expiration date thereof. Except as setforth on Schedule 2.3, the Company does not have outstanding any bonds, debentures, notes or other obligations theholders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with theStockholders of the Company on any matter. Except as set forth on Schedule 2.3, there are no outstanding obligations ofthe Company to repurchase, redeem or otherwise acquire any shares of its capital stock or make any investment (in theform of a loan, capital contribution or otherwise) in any other Person except for outstanding rights of the Company torepurchase unvested shares of Company Common Stock, at the original purchase price paid per share, upon the holder�stermination of service or employment with the Company. All of the issued and outstanding shares of the CompanyCapital Stock have been duly authorized and validly issued in accordance with applicable laws and are fully paid andnon-assessable and not subject to preemptive rights. Except as set forth on Schedule 2.3, no shares of capital stockof the Company have been reserved for any purpose. Each issued and outstanding share of Series B Preferred Stockis convertible into one share of Company Common Stock. Except as set forth in Schedule 2.3, the Company is not aparty to, and does not otherwise have any knowledge of the current existence of, any stockholder agreement, votingtrust agreement or any other similar contract, agreement, arrangement, commitment, plan or understanding relating tothe voting, dividend, ownership or transfer rights of any shares of capital stock of the Company. The Company hasprovided to Parent a true and complete copy of the Company�s Stock Plan and a sample of each the agreements andother instruments referred to in this Section 2.3, including warrants, options and redemption agreements. Each of theinstruments and agreements referred to in Schedule 2.3 has been made available to Parent.

SECTION 2.4 Authority.

a. The execution and delivery of this Agreement by the Company and the consummation by the Company of thetransactions contemplated hereby have been duly and validly authorized by all necessary corporate action andno other corporate proceedings on the part of the Company are necessary to authorize this Agreement or toconsummate the transactions contemplated hereby, except approval by holders of a majority of the shares ofthe Company Common Stock and the holders of two-thirds of the Company Preferred Stock, each voting as aseparate class (the �Company Requisite Vote�). This Agreement has been duly executed and delivered by theCompany, and assuming due authorization, execution and delivery by Parent and Merger Sub, this Agreementconstitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms,



except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and othersimilar laws of general applicability relating to or affecting creditors� rights generally and by the applicationof general principles of equity.

b. The Board of Directors of the Company has duly and unanimously approved this Agreement and the Mergerand the other transactions contemplated hereby, to which the Company is a party, and has recommendedadoption thereof by the Stockholders.

c. Upon the execution and delivery by the Stockholder Representatives (as hereinafter defined) of the EscrowAgreement, the Escrow Agreement will constitute the valid and binding obligation of the Stockholders andStockholder Representatives, enforceable against the Stockholders and Stockholder Representatives, inaccordance with its terms.

SECTION 2.5 No Conflict; Required Filings and Consents.

a. The execution and delivery of this Agreement by the Company does not, and the performance by theCompany of its obligations under this Agreement will not, (i) conflict with or violate the Company Certificateor the bylaws of the Company, (ii) conflict with or violate in any material respect any Law applicable to theCompany, or (iii) except as set forth in Schedule 2.5(a), result in any material breach of or constitute amaterial default (or an event which with notice or lapse of time or both would become a material default)under any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise orother instrument or obligation to which it is subject.

b. Except as set forth in Schedule 2.5(b), the execution and delivery of this Agreement by the Company does not,and the performance of this Agreement by the Company will not, require any consent, approval, authorizationor permit of, or filing with or notification to, any Government Entity by the Company, except for the filing ofa Certificate of Merger under the DGCL and filings under the Hart-Scott-Rodino Antitrust Improvements Actof 1976, as amended (the �Hart-Scott-Rodino Act�).

SECTION 2.6 Financial Statements. Attached hereto as Schedule 2.6 are (a) the audited balance sheets of theCompany as of December 31, 1999 and 2000 and the audited statements of operations and cash flows for the fiscalyears ended December 31, 1999 and 2000 and (b) the unaudited balance sheet of the Company as of September 30,2001, and the unaudited statement of operations and cash flows for the nine months then ended (collectively, the�Financial Statements�). The audited financial statements referred to in this Section 2.6 present fairly, in all materialrespects, the financial condition of the Company as of the respective dates and the results of operations and cashflows for the respective periods indicated and have been prepared in accordance with United States generally acceptedaccounting principles (�GAAP�) applied on a consistent basis. Except as set forth on Schedule 2.6, the unauditedfinancial statements referred to in this Section 2.6 present fairly, in all material respects, the financial condition of theCompany as of the respective dates and the results of operations and cash flows for the respective periods indicated andhave been prepared in accordance with GAAP applied on a consistent basis except for the absence of required footnotesand subject to normal and recurring year-end audit adjustments not material in amount. All audited financial statementsincluded in the Financial Statements are accompanied by unqualified audit reports of Arthur Andersen LLP. Except asset forth on Schedule 2.6 or as reflected in the unaudited balance sheet of the Company as of December 31, 2000 (the�Balance Sheet Date�), the Company has incurred no material liabilities, contingent or absolute, matured or unmatured,known or unknown, and knows of no basis for such liabilities, other than liabilities of the same nature as those set forthin the balance sheets as included in the Financial Statements and the notes thereto and incurred in the Ordinary Courseof Business consistent with past practice after the Balance Sheet Date.

SECTION 2.7 Absence of Certain Changes or Events. Since the Balance Sheet Date, there has been no event or setof circumstances that resulted in or is reasonably likely to result in a Company Material Adverse Effect. Except as setforth on Schedule 2.7, since the Balance Sheet Date, the Company has conducted its business in the Ordinary Course



of Business, and has not (a) paid any dividend or distribution in respect of, or redeemed or repurchased any of, itscapital stock; (b) incurred loss of, or significant injury to, any of the material Assets, whether as the result of any naturaldisaster, labor trouble, accident, other casualty, or otherwise; (c) incurred, or become subject to, any material liability(absolute or contingent, matured or unmatured, known or unknown), and knows of no basis for such liabilities, exceptcurrent liabilities incurred in the Ordinary Course of Business; (d) mortgaged, pledged or subjected to any Encumbranceany of the Assets; (e) sold, leased (as lessor), exchanged, transferred or otherwise disposed of any of the Assets exceptin the Ordinary Course of Business, or canceled any debts or claims; (f) written down the value of any Assets or writtenoff as uncollectible any accounts receivable, except write downs and write-offs in the Ordinary Course of Business,none of which, individually or in the aggregate, are material; (g) entered into any transactions other than in the OrdinaryCourse of Business; (h) made any change in any method of accounting or accounting practice; (i) made any Tax electionnot required by law or settled or compromised any material federal, state, local or foreign income Tax liability inexcess of $50,000; or (j) made any agreement to do any of the foregoing, other than negotiations with Parent and itsrepresentatives and certain other parties regarding the transactions contemplated by this Agreement. Since the BalanceSheet Date, except as set forth on Schedule 2.7, there has not been: (a) any damage, destruction or loss (whether or notcovered by insurance) or any other event materially and adversely affecting the business or Assets of the Company;(b) any forgiveness or cancellation of debts or claims owed to the Company; (c) any increase in the compensation orbenefits payable or to become payable by the Company to any of the directors, officers, consultants or employees ofthe Company, other than salary increases in connection with customary performance reviews and customary bonusesconsistent with past practices; (d) any discharge or satisfaction of any Lien or payment of any liability or obligation bythe Company other than current liabilities in the Ordinary Course of Business; or (e) any agreement to do any of theforegoing, other than negotiations with Parent and its representatives and certain other parties regarding the transactionscontemplated by this Agreement.

SECTION 2.8 Ownership and Condition of the Assets. Except as set forth on Schedule 2.8, the Company is thesole and exclusive legal and equitable owner of and has good and marketable title to the Assets it purports to own(including all of the assets reflected on the Balance Sheet as being owned by it and all of the assets thereafter acquiredby it, except to the extent that such assets have been disposed of after the Balance Sheet Date in the Ordinary Courseof Business consistent with past practice) and such Assets are free and clear of all Encumbrances other than PermittedEncumbrances. No person or Government Entity has an option to purchase, right of first refusal or other similar rightwith respect to all or any part of such Assets. All of the personal property of the Company is in good working orderand repair, ordinary wear and tear excepted, and is suitable and adequate for the uses for which it is intended or is beingused. The assets owned, leased or licensed by the Company constitute all the assets used in its business (including, butnot limited to, all books, records, computers and computer programs and data processing systems).

SECTION 2.9 Leases. Schedule 2.9 lists all leases and other agreements under which the Company is lessee orlessor of any Asset, or holds, manages or operates any Asset owned by any third party, or under which any Asset ownedby the Company is held, operated or managed by a third party. The Company is the holder of all the leasehold estatespurported to be granted to such entity by the leases listed in Schedule 2.9 and is the owner of all equipment, machineryand other Assets purported to be owned by the Company thereon, free and clear of all Encumbrances other thanPermitted Encumbrances. Each such lease and other agreement is in full force and effect and constitutes a legal, validand binding obligation of, and is legally enforceable against, the respective parties thereto (except as such enforceabilitymay be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws of general applicabilityrelating to or affecting creditors� rights generally and by the application of general principles of equity) and grantsthe leasehold estate it purports to grant free and clear of all Encumbrances other than Permitted Encumbrances. Allnecessary governmental approvals required to be obtained by the Company with respect thereto have been obtained,all necessary filings or registrations therefor have been made, and to the Company�s Knowledge, there have been nothreatened cancellations thereof and are no outstanding disputes thereunder. The Company has performed in all materialrespects all obligations thereunder required to be performed by it to date. The Company is not in default in any materialrespect under any of the foregoing and to the Company�s Knowledge, no other party is in default in any material respectunder any of the foregoing, and there has not occurred any event which (whether with or without notice, lapse of time



or the happening or occurrence of any other event) would, constitute a default on the part of the Company, or to theCompany�s Knowledge, a party other than the Company.

SECTION 2.10 Other Agreements.

a. Schedule 2.10(a) is an accurate list of all material contracts and agreements to which the Company is a party,or which it or any of its property is bound, (including, without limitation, any marketing, manufacturing,distribution or OEM agreements, joint venture agreements, employment or severance contracts, loanagreements, bonds, mortgages, liens, pledges or other security agreements) used in connection with, orrelating to the conduct of the business of the Company (together with the agreements listed on Schedules 2.9,2.10(b) and 2.11, the �Contracts�). Such agreements include each agreement and contract to which theCompany is a party that limits the right of the Company to engage in, or to compete with any person in, anybusiness, including each contract or agreement containing exclusivity provisions restricting the geographicalarea in which, or the method by which, any business may be conducted by the Company prior to the EffectiveTime.

b. Except as set forth on Schedule 2.10(b), the Company is not:i. a party to any contract, purchase or sales orders, or commitment that involves a dollar amount in

excess of $250,000 or extends for a period of twelve months or more;ii. a party to any employment contracts with employees, agents or consultants or to any indemnification

agreement with officers or directors;iii. a party to any contract with sales or other agents, brokers, franchisees, distributors or dealers;iv. a party to any partnership or joint venture agreement;v. a party to any lease or other occupancy or use agreements, oral or written, nor has the Company

granted any options, rights of first refusal or security or other interests other than PermittedEncumbrances in or relating to the Assets or the business of the Company;

vi. a party to any agreements giving any party the right to renegotiate or require a reduction in price orrefund of payments previously made in connection with the business of the Company;

vii. a party to any agreements for the borrowing or lending of money with respect to the business of theCompany and is not a party to any guaranty agreement;

viii. a party to any agreements that contain any provisions requiring the Company to indemnify any otherparty thereto;

ix. a party to any agreement for the sale of goods or services to any Governmental Entity;x. a party to any agreement granting any Person a Lien on any of the Assets other than Permitted

Encumbrances;xi. a party to any bonus, executive or deferred compensation, profit sharing, pension or retirement, stock

option or stock purchase, hospitalization, insurance, medical reimbursement or other plan, agreementor arrangement or practice providing employee or executive benefits to any officer or employee orformer officer or former employee;

xii. a party to or bound by any non-competition, secrecy or confidentiality agreement relating to thebusiness of the Company or the Assets or any other contract restricting its right in any material way toconduct the business of the Company at any time, in any manner or at any place in the world, or theexpansion thereof to other geographical areas, customers, suppliers or lines of business; and

xiii. a party to any agreement relating to the marketing, distribution or manufacturing of products,services, processes or technology, or any OEM agreement.

n. A true and correct copy of each Contract has been made available to Parent prior to the date hereof. EachContract is now valid, in full force and effect and enforceable in accordance with its terms (except as suchenforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws ofgeneral applicability relating to or affecting creditors� rights generally and by the application of generalprinciples of equity). The Company has not breached or improperly terminated any such Contract, the effect



of which could have a Company Material Adverse Effect, and neither the Company nor, to the Knowledge ofthe Company, any third party is in default under any such Contract, the effect of which would have aCompany Material Adverse Effect. To the Knowledge of the Company there exists no condition or eventwhich, after notice or lapse of time or both, would constitute any such breach, termination or default.

SECTION 2.11 Real Property. Schedule 2.11 contains a list of all leasehold interests in real estate, easements,rights to access, rights-of-way and other real property interests which are owned, or are leased, used or held for use bythe Company (collectively, the �Real Property�). The Real Property listed in Schedule 2.11 constitutes all real propertyinterests necessary to conduct the business and operations of the Company as now conducted. The Company is notaware of any easement or other real property interest, other than those listed in Schedule 2.11, that is required, or thathas been asserted by a Government Entity to be required, to conduct the business and operations of the Company. TheCompany has made available to Parent true and complete copies of all deeds, leases, easements, rights-of-way andother instruments pertaining to the Real Property (including any and all amendments and other modifications of suchinstruments). All Real Property (including the improvements thereon) (i) is in good condition and repair other thanconditions that do not adversely affect its use by the Company and consistent with its present use, (ii) is available to theCompany for immediate use in the conduct of its business and operations, and (iii) to the Knowledge of the Companycomplies in all material respects with all applicable building or zoning codes and in the regulations of any GovernmentEntity having jurisdiction.

SECTION 2.12 Environmental Matters.

a. The Company has complied in all material respects with all Environmental Laws. There are no pending or, tothe Knowledge of the Company, threatened actions, suits, claims, legal proceedings or other proceedingsagainst the Company based on any Environmental Laws, and the Company has not received any notice of anycomplaint, order, directive, citation, notice of responsibility, notice of potential responsibility, or informationrequest from any Government Entity or any other person arising out of or attributable to: (i) the current or pastpresence at any part of the Real Property of Hazardous Materials (as defined below) or any substances thatpose a hazard to human health or an impediment to working conditions; (ii) the current or past release orthreatened release into the environment from the Real Property (including, without limitation, into any stormdrain, sewer, septic system or publicly owned treatment works) of any Hazardous Materials or any substancesthat pose a hazard to human health or an impediment to working conditions; (iii) the off-site disposal ofHazardous Materials originating on or from the Real Property; (iv) any facility operations or procedures of theCompany which do not conform to requirements of the Environmental Laws; or (v) any violation ofEnvironmental Laws at any part of the Real Property or otherwise arising from the Company�s activitiesinvolving Hazardous Materials.

b. The Company has been duly issued, and currently has all material permits, licenses, certificates and approvalsrequired to be maintained by the Company under any Environmental Law with respect to the use of the RealProperty by the Company. A true and complete list of such permits, licenses, certificates and approvals, all ofwhich are valid and in full force and effect, is set out in Schedule 2.12. Except in accordance with suchpermits, licenses, certificates and approvals, there has been no discharge of any Hazardous Materials or anyother material regulated by such permits, licenses, certificates or approvals.

c. None of the Real Property contains any underground storage tanks, or underground piping associated withsuch tanks, used currently or in the past for Hazardous Materials.

SECTION 2.13 Litigation. Except as set forth on Schedule 2.13, the Company is not directly involved in anypending action, suit, investigation, claim, arbitration or litigation and, to the Knowledge of the Company, no such matteris threatened against or involving the Company, or the Assets, at law or in equity, or before or by any court, arbitratoror Government Entity, in each case, which could, individually or in the aggregate, be reasonably expected to have aCompany Material Adverse Effect. The Company is not operating under, and is not subject to, any judgment, writ,



order, injunction, award or decree of any court, judge, justice or magistrate, including any bankruptcy court or judge,or any order of or by any Governmental Entity. No property or Assets of the Company has been taken or expropriatedby any federal, state, provincial, municipal or other Government Entity nor has any notice or proceeding with respect tothereof been given or commenced, nor is the Company aware of any intent or proposal by any Governmental Entity togive any such notice or commence any such proceeding.

SECTION 2.14 Compliance with Laws. The Company is in compliance in all material respects with all Lawsapplicable to the Assets and its business and operations, including all Laws applicable to the Company�s relationshipwith its employees.

SECTION 2.15 Intellectual Property.

a. The Company has all right, title, interest and license rights necessary to use all material intellectual propertyused in the business, activities and products of the Company as of the date hereof (the �Intellectual PropertyRights�). There are no claims or demands against the Company by any other Person pertaining to any of suchIntellectual Property Rights and no proceedings have been instituted, or are pending or to the Knowledge ofthe Company, threatened, which challenge the rights of the Company in respect thereof. The Company has theright to use, without infringing or otherwise violating the rights of others, all customer lists, designs,manufacturing or other processes, computer software, systems, data compilations, research results and otherinformation required for or incident to its products or its business as presently conducted.

b. Schedule 2.15(b) lists all patents, patent applications, registered trademarks, trademark applications andregistrations and registered copyrights owned or licensed by or registered in the name of the Company or usedby the Company in its business, activities or products as of the date hereof. All of such patents, patentapplications, registered trademarks, trademark applications and registrations and registered copyrights, if any,have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the UnitedStates Register of Copyrights, or the corresponding offices of other jurisdictions as identified on Schedule2.15(b), and have been properly maintained and renewed in accordance with all applicable provisions of lawand administrative regulations in the United States and each such jurisdiction except as set forth on Schedule2.15(b). Except as disclosed in Section 2.15(b): (i) to the Company�s Knowledge, all such patents,registrations and applications are not subject to any oppositions, abandonments, cancellations, interferences orother challenges or proceedings; and (ii) the Company has the sole and exclusive right to bring actions forinfringement or unauthorized use of all such patents or registrations, or patents or registrations that result fromsuch applications, and there is no basis for any such action to the Knowledge of the Company. True andcomplete copies of all such patents, registrations and applications have been furnished to Parent.

c. All licenses or other agreements under which the Company is granted or otherwise transferred rights inIntellectual Property Rights are listed on Schedule 2.15(c). All such licenses or other Agreements are in fullforce and effect, there is no material default by the Company or, to the Company�s Knowledge, any partythereto. To the Company�s Knowledge, the licensors or transferor under such licenses and other agreementshave and had all requisite power and authority to grant or transfer the rights purported to be conferred thereby.True and complete copies of all such licenses or other Agreements, and any amendments thereto, have beenfurnished to Parent.

d. All licenses or other agreements under which the Company has granted or otherwise transferred rights toothers in Intellectual Property Rights owned or licensed by the Company are listed on Schedule 2.15(d).Licenses granted by the Company in the sale of its products to others protect the Company�s IntellectualProperty Rights in a manner that is consistent with standard industry practice. All of such licenses or otheragreements are in full force and effect, there is no material default by the Company, or to the Company�sKnowledge, by any party thereto. True and complete copies of all such licenses or other agreements, and anyamendments thereto, have been furnished to Parent.



e. The Company has taken all reasonable steps it believes to be required in accordance with sound businesspractice to establish and preserve its sole ownership of all material patent, copyright, mask work, trade secretand other proprietary rights with respect to its business, products and technology, and the Company hasestablished and preserved its sole ownership of all such patent, copyright, mask work, trade secret and otherproprietary rights. The Company has required all professional and technical employees and independentcontractors to execute written agreements that validly operate to assign to the Company, or otherwise vest inthe Company, sole ownership of such rights. To the Company�s Knowledge, the conveying party(ies) undersuch agreements have and had all requisite power and authority to grant the rights purported to be conferredthereby. The Company does not jointly hold any ownership rights with any other person or Government Entitynor does any person or Government Entity have any option to license or franchise, right of first refusal, orother similar rights with respect to the Intellectual Property Rights. No aspect of the Company�s business orproducts have been developed pursuant to or are otherwise subject to any governmental grant or any otherright of any Government Entity. The Company has required all employees, contractors, consultants or otherPersons having access to valuable non-public information of the Company to execute written agreementsunder which such Persons are required to maintain the confidentiality of such information and under which theuse thereof is restricted to use for the exclusive benefit of Company as directed by Company. Except as setforth on Schedule 2.15(e), all such agreements governing access to valuable non-public information of theCompany require the confidentiality of such information to be maintained perpetually and limit access to onlythose Persons who are bound by the obligations of the agreement and who also have a need to know suchinformation. The Company does not have Knowledge of any infringement or other violation by others of anyIntellectual Property Rights of the Company. All employees of the Company have each signed agreements inaccordance with the form of Invention and Non-Disclosure Agreement and form of Non-CompetitionAgreement set forth in Schedule 2.15(e). In the conduct of the business of the Company, no employee of theCompany has made any unauthorized use of any proprietary information or technology owned by a formeremployer of the employee or by any other third party. True and complete copies of all agreements describedby this Section 2.15(e) have been furnished to Parent. Moreover all such agreements are in full force andeffect, and there is no material default by the Company, or to the Company�s Knowledge, by any other partythereto. Neither the Company, nor its employees or agents, have taken any action or failed to take any actionwhich adversely affects in a material manner the Company�s rights in any of the Intellectual Property Rights.Moreover, the transactions contemplated by this Agreement or any ancillary agreement shall have no adverseeffect on the Intellectual Property Rights, and the Company�s rights thereto immediately after the EffectiveTime shall be identical to the Company�s rights immediately prior to the Effective Time.

f. Except as set forth on Schedule 2.15(f), the business, activities and products of the Company as of the datehereof do not infringe or otherwise violate any intellectual property rights of any other Person. No proceedingcharging the Company with infringement or other violation of any intellectual property rights has been filedor, to the Knowledge of the Company, is threatened to be filed. Moreover, there is and has been no claimreceived by the Company which charges the Company with infringement or other violation of any intellectualproperty rights, nor to the Knowledge of the Company is there any basis for any such claim.

g. To the Knowledge of the Company, the Company�s released products operate in all material respects inaccordance with specifications. The Company is not aware of any material defects in the Company�s releasedproducts.

h. To the Knowledge of the Company, the products and services provided to the Company under the agreementset forth in Section III of Schedule 2.10(a) and marked with an asterisk will, after the date hereof, remaingenerally available to the Company.

SECTION 2.16 Taxes and Assessments. The Company has (i) timely filed all Tax Returns required to have beenfiled by the Company; all such Tax Returns are complete and accurate in all material respects and disclose all Taxesrequired to be paid by the Company for the periods covered thereby and all Taxes shown to be due on such Tax Returns



have been timely paid; (ii) duly and timely paid all Taxes which have become due and payable by it, and there areno agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any TaxReturn or the payment of any Tax; (iii) received no written notice of, nor does the Company have any Knowledge of,any notice of deficiency or assessment or proposed deficiency or assessment from any taxing Governmental Entity; (iv)no Knowledge of any audits pending and there are no outstanding agreements or waivers by the Company that extendthe statutory period of limitations applicable to any Tax Returns or Taxes; and (v) not entered into any discussions withany taxing Governmental Entity about any Tax liability where such Governmental Entity has questioned the accuracyof a specific item included on or omitted from a Tax Return filed by the Company. Since the inception of the Company,the Tax Returns of the Company have never been audited by any taxing Governmental Entity. There are no Liens onany property of the Company that arose in connection with any failure (or alleged failure) to pay any material Tax whendue. The Company has withheld from each payment made to any of its past or present employees, officers or directors,and to any other Person, the amount of Taxes and other deductions required to be withheld therefrom and has paid thesame (or set aside for timely payment) to the proper Governmental Entity or other receiving officers within the timerequired under applicable Laws. The provision for Taxes of the Company, if any, as shown in the Financial Statementsis adequate for Taxes due or accrued as of the date thereof. The Company is not, and has not been within the timeperiod prescribed by Section 897(c)(1)(A)(ii), a United States real property holding corporation within the meaning ofSection 897(c)(2) of the Code. As a result of the transactions contemplated by this Agreement, the Company will notbe obligated to make a payment that would be an �excess parachute payment� to a �disqualified individual� as thoseterms are defined in Section 280G of the Code. The Company is not party to any written or unwritten agreement orarrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated,combined or unitary Tax Return which Tax Return includes the Company. Neither the Company nor any predecessoris or has ever been a member of (i) any �affiliated group� (as defined in Section 1504(a) of the Code without regard tothe limitations contained in Section 1504(b) of the Code) or (ii) any other group of corporations or entities which filesor has filed Tax Returns on a combined, consolidated or unitary basis.

SECTION 2.17 Employment and Benefit Matters.

a. Pension and Benefit Plans and Other Arrangements. Schedule 2.17(a) lists each employee benefit andcompensation plan, program, arrangement and contract (including, without limitation, any �employee benefitplan� as defined by Section 3(3) of ERISA), applicable to employees of the Company to which it hascontributed or under which it has, or could have, any material liability (collectively, the �Company BenefitPlans�). The Company has made available to Parent, to the extent they exist, a true and correct copy of (i) themost recent annual report (Form 5500 series) filed with the Internal Revenue Service (the �IRS�) with respectto each Company Benefit Plan or similar report of the jurisdiction in which such employee benefit plan islocated, (ii) each such Company Benefit Plan document, (iii) each trust agreement or other funding vehiclerelating to each such Company Benefit Plan, (iv) the most recent summary plan description for each CompanyBenefit Plan for which a summary plan description is required, and (v) the most recent determination letterissued by the IRS with respect to any Company Benefit Plan qualified under Section 401(a) of the Code orsimilar report of the jurisdiction in which such employee benefit plan is located. Neither the Company nor anyentity considered to be a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of theCode (an �ERISA Affiliate�) has at any time during the past six years had any obligation to contribute to, orhad any liability under, a �multiemployer plan,� as defined in Section 4001(a)(3) of ERISA. Neither theCompany nor any ERISA Affiliate has any liability or obligation under any welfare plan or agreement toprovide benefits after termination of employment to any employee or dependent other than as required bySection 4980B of the Code. Schedule 2.17(a) contains a list of all plans, programs, agreements and otherarrangements of the Company with or relating to its current and former employees containing change ofcontrol or similar provisions. No current or former employee of the Company has any Company StockOptions, Company Warrants or shares of restricted Company Common Stock that provide for acceleration ofvesting solely as a result of the Merger. The Company is not a party to any agreement, contract orarrangement that could result, separately or in the aggregate, in the payment of any �excess parachutepayments� within the meaning of Section 280G of the Code.



b. Compliance. The Company has complied, in all material respects, with all applicable provisions of theCompany Benefit Plans and the Code, ERISA, the National Labor Relations Act, Title VII of the Civil RightsAct of 1964, the Age Discrimination in Employment Act, the Fair Labor Standards Act, the Securities Act of1933, as amended (the �Securities Act�), and all other Laws pertaining to the Company Benefit Plans or theCompany�s relations with its employees, and other employee or employment related benefits, and allpremiums and assessments relating to all Company Benefit Plans. The Company has no liability for anydelinquent contributions within the meaning of Section 515 of ERISA (including, without limitation, relatedattorneys� fees, costs, liquidated damages and interest) or for any arrearages of wages. The Company has nopending unfair labor practice charges, contract grievances under any collective bargaining agreement, otheradministrative charges, claims, grievances or lawsuits before any court, governmental agency, regulatorybody, or arbiter arising under any Law governing any Plan, and, to the Knowledge of the Company, there existno facts that could reasonably be expected to give rise to such a claim. Except as set forth on Schedule2.17(b), all Company Benefit Plans that are intended by their terms to be, or are otherwise treated by theCompany as, qualified under Section 401(a) of the Code have been determined by the IRS to be so qualified,or a timely application for such determination is now pending and, to the Knowledge of the Company, allCompany Benefit Plans are so qualified in operation.

c. Collective Bargaining Agreements. There are no collective bargaining agreements applicable to theCompany�s employees and the Company has no duty to bargain with any labor organization with respect toany such persons. There is not pending any demand for recognition or any other request or demand from alabor organization for representative status with respect to any persons employed by the Company.

d. Employee Information. The Company has made available to Parent a list of the names, positions and rates ofcompensation of all officers, directors, employees and consultants of the Company, as of the date hereof,showing each such person�s name, positions, and annual remuneration, bonuses and fringe benefits for thecurrent fiscal year and the most recently completed fiscal year. With respect to any persons employed by theCompany, the Company is in material compliance with all Laws respecting employment conditions andpractices, has withheld all amounts required by any applicable Laws to be withheld from wages and has notbeen assessed any Taxes or penalties for failure to comply with any of the foregoing.

e. Employment Practices. Except as set forth on Schedule 2.17(e), with respect to any persons employed by theCompany, (i) the Company has not engaged in any unfair labor practice within the meaning of the NationalLabor Relations Act and has not violated any legal requirement prohibiting discrimination on the basis of race,color, national origin, sex, religion, age, marital status, or handicap in its employment conditions or practices;and (ii) there are no pending or, to the Knowledge of the Company, threatened unfair labor practice charges ordiscrimination complaints relating to race, color, national origin, sex, religion, age, marital status, or handicapagainst the Company before any Government Entity nor, to the Knowledge of the Company, does any basistherefor exist.

f. Contributions to the Company Benefit Plans. All contributions to, and payments from, each Company BenefitPlan which may have been required to be made in accordance with the terms of such plan, and, whereapplicable, the laws of the jurisdiction which govern such plan, have been made in a timely manner, and allmaterial reports, returns and similar documents (including applications for approval of contributions) withrespect to any Company Benefit Plan required to be filed with any Government Entity or distributed to anyparticipant of such plan have been duly filed on a timely basis or distributed. The Assets of each CompanyBenefit Plan subject to Title IV of ERISA are at least equal to the liabilities of such plan based on the actuarialassumptions utilized in the most recent valuation performed by an actuary for such plan.

g. Immigration Laws. The Company has complied, in all material respects, with all Laws governing theemployment of personnel by U.S. companies and the employment of non-U.S. nationals in the United States,



including, but not limited to, the Immigration and Nationality Act 8 U.S.C. Sections 1101 et seq. and itsimplementing regulations.

SECTION 2.18 Transactions with Related Parties. Except as set forth on Schedule 2.18, neither any present orformer officer, director, stockholder of the Company or person known by the Company to be an Affiliate of any of them,is currently a party to any transaction or agreement with the Company, including, without limitation, any agreementproviding for the employment of, furnishing of services by, rental of Assets from or to, or otherwise requiring paymentsto, any such officer, director, stockholder or Affiliate.

SECTION 2.19 Insurance and List of Claims. Schedule 2.19 contains a list of all policies of title, property, fire,casualty, liability, life, workmen�s compensation, libel and slander, and other forms of insurance of any kind relatingto the business and operations of the Company in each case which are in full force and effect as of the date hereof. TheCompany has made available to Parent true and correct copies of all such policies. All such policies: (a) are sufficientfor compliance by the Company with all requirements of applicable Law and of all licenses, franchises and otheragreements to which the Company is a party; and (b) are valid, outstanding, and enforceable policies. All premiums dueand payable on all such policies have been paid. The Company shall maintain such insurance or comparable insurancein full force and effect through the Effective Time. The Company has complied with each such insurance policy andhas not failed to give any material notice or to present any material claim thereunder in a due and timely manner.

SECTION 2.20 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder�s or other feeor commission in connection with the transactions contemplated by this Agreement based upon arrangements made byor on behalf of any of the Company, except for a fee to be paid by the Company to Thomas Weisel Partners LLC uponconsummation of the Merger (as reflected in an agreement between Thomas Weisel Partners LLC and the Company, acopy of which has been furnished to Parent).

SECTION 2.21 Disclosure. True and complete copies of all documents listed in the Schedules to this Agreementhave been made available or provided to Parent. The books of account, stock record books and other financial andcorporate records of the Company, all of which have been made available to Parent, are materially complete and correctand have been maintained in accordance with good business practices, including the maintenance of an adequate systemof internal accounting controls, and such book and records are accurately reflected in the Financial Statements. Theminute books of the Company contain accurate and complete records of all meetings held of, and corporate action by,the stockholders and the board of directors (and committees thereof) of the Company, and no meeting of any suchstockholders or board of directors (or committees thereof) has been held for which minutes have not been prepared andare not contained in such minute books.

SECTION 2.22 Takeover Statutes. To the Knowledge of the Company, no state takeover statutes are applicable tothe Merger, this Agreement or the Stockholders� Agreement, and the transactions contemplated hereby and thereby.

ARTICLE III

Representations and Warranties of Parent

Parent represents and warrants to the Company as follows:

SECTION 3.1 Organization and Qualification. Parent is a corporation duly organized, validly existing and in goodstanding under the laws of the State of Delaware. Parent has the requisite power and authority to own, lease and operateits Assets and properties, to carry on its business as now being conducted and to perform the terms of this Agreementand the transactions contemplated hereby. Parent is duly qualified to conduct its business, and is in good standing, ineach jurisdiction where the ownership or leasing of its properties or the nature of its activities in connection with theconduct of its business makes such qualification necessary, except for those jurisdictions in which the failure to be soqualified and in good standing would not have a Parent Material Adverse Effect.



SECTION 3.2 Certificate of Incorporation and Bylaws. Parent has previously made available to Companycomplete and correct copies of its Certificate of Incorporation and Bylaws, as amended to date (together, the �ParentCharter Documents�). Such Parent Charter Documents and equivalent organizational documents of each of itssubsidiaries are in full force and effect.

SECTION 3.3 Authority. The execution and delivery of this Agreement by Parent and the consummation by Parentof the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action andno other corporate proceedings on the part of Parent are necessary to authorize this Agreement or to consummate thetransactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and, assuming thedue authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of Parent,enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency,reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors� rightsgenerally and by the application of general principles of equity.


a. The execution and delivery of this Agreement by Parent does not, and the performance by Parent of itsobligations under this Agreement will not, (i) conflict with or violate the certificate of incorporation or bylawsof Parent, (ii) conflict with or violate any Law applicable to Parent or its Assets and properties, or (iii) result inany breach of or constitute a default (or an event which with the notice or lapse of time or both would becomea default) under any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise orother instrument or obligation to which Parent is a party or by which Parent is bound, or by which any of itsproperties or Assets is subject, except such breach or default which would not result in a Parent MaterialAdverse Effect.

b. The execution and delivery of this Agreement by Parent does not, and the performance of this Agreement byParent will not, require any consent, approval, authorization or permit of, or filing with or notification to, anyGovernment Entity other than the filing of a Certificate of Merger under the DGCL, the filings under the Hart-Scott-Rodino Act and any filings, consents, approvals, permits or authorizations required outside of the UnitedStates.

SECTION 3.5 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder�s or other feeor commission in connection with the transactions contemplated by this Agreement based upon arrangements made byor on behalf of Parent, except for the fee to be paid by Parent to Credit Suisse First Boston.

SECTION 3.6 SEC Filings. Parent has filed all reports, forms and other documents (�Parent SEC Documents�)required to be filed by it with the Securities and Exchange Commission (the �SEC�) since January 1, 2001. The ParentSEC Documents (i) at the time filed, complied in all material respects with the requirements of the Securities ExchangeAct of 1934, as amended (the �Exchange Act�) or the Securities Act, as the case may be, and the rules and regulations ofthe SEC promulgated thereunder applicable to such Parent SEC Documents and (ii) did not, at the time they were filed,contain any untrue statements of a material fact or omit to state a material fact required to be stated therein or necessaryin order to make the statements made therein, in light of the circumstances under which they were made, not misleading.The financial statements of Parent included in the Parent SEC Documents as of their respective dates comply as to formin all material respects with applicable accounting requirements and the published rules and regulations of the SEC withrespect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case ofunaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involvedand fairly present in all material respects the consolidated financial position of Parent and its consolidated subsidiariesas of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject,in the case of unaudited statements, to normal and recurring year-end audit adjustments not material in amount).



SECTION 3.7 Absence of Certain Changes or Events. Since September 30, 2001, there has not been any event orset of circumstances that resulted in or is reasonably likely to result in a Parent Material Adverse Effect.

SECTION 3.8 Sufficient Funds. At the Effective Time, Parent will have available funds sufficient to perform itsobligations hereunder.

ARTICLE IV

Representations and Warranties of Merger Sub

Parent and Merger Sub jointly and severally represent and warrant to the Company as follows:

SECTION 4.1 Organization and Qualification. Merger Sub is a corporation duly organized, validly existing andin good standing under the laws of the State of Delaware. Merger Sub has the requisite power and authority to own,lease and operate its Assets and properties, to carry on its business as now being conducted and to perform the termsof this Agreement and the transactions contemplated hereby. Merger Sub is duly qualified to conduct its business, andis in good standing, in each jurisdiction where the ownership or leasing of its properties or the nature of its activities inconnection with the conduct of its business makes such qualification necessary.

SECTION 4.2 Authority. The execution and delivery of this Agreement by Merger Sub and the consummation byMerger Sub of the transactions contemplated hereby have been duly and validly authorized by all necessary corporateaction and no other corporate proceedings on the part of Merger Sub are necessary to authorize this Agreement or toconsummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by MergerSub and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and bindingobligation of Merger Sub, enforceable in accordance with its terms, except as such enforceability may be limitedby bankruptcy, insolvency, reorganization, moratorium and other similar laws of general applicability relating to oraffecting creditors� rights generally and by the application of general principles of equity.


a. The execution and delivery of this Agreement by Merger Sub does not, and the performance by Merger Sub ofits obligations under this Agreement will not, (i) conflict with or violate the certificate of incorporation orbylaws of Merger Sub, (ii) conflict with or violate any Law applicable to Merger Sub or its Assets andproperties, or (iii) result in any breach of or constitute a default under any note, bond, mortgage, indenture,contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Merger Sub isa party or by which Merger Sub is bound, or by which any of its properties or Assets is subject.

b. The execution and delivery of this Agreement by Merger Sub does not, and the performance of thisAgreement by Merger Sub will not, require any consent, approval, authorization or permit of, or filing with ornotification to, any Government Entity, except for the matters referred to in Section 3.4(b) and the filing of theCertificate of Merger under the DGCL.

SECTION 4.4 No Prior Activities. Except for obligations incurred in connection with its incorporation ororganization or the negotiation and consummation of this Agreement and the transactions contemplated hereby, MergerSub has neither incurred any obligation or liability nor engaged in any business or activity of any type or kindwhatsoever or entered into any agreement or arrangement with any other person. As of the date hereof and the EffectiveTime, all of the outstanding capital stock of Merger Sub is and will be directly owned by Parent.

ARTICLE V

Conduct of Business Pending Closing



SECTION 5.1 Conduct of Business Pending Closing. From the date hereof until the Closing, the Company shall:

i. maintain its existence in good standing;

ii. maintain the character of its business and properties and conduct its business in the ordinary and usual mannerconsistent with past practices, except as expressly permitted or required by this Agreement;

iii. maintain business and accounting records consistent with past practices; and

iv. use commercially reasonable efforts (a) to preserve its business intact, (b) to keep available to the Companythe services of its present officers and employees, and (c) to preserve for the Company the goodwill of itssuppliers, customers and others having business relations with the Company.

SECTION 5.2 Prohibited Actions Pending Closing. Unless otherwise listed on Schedule 5.2, or otherwiseexpressly required by this Agreement, or approved by Parent in writing, from the date hereof until the Closing, theCompany shall not:

i. amend or otherwise change the Company Certificate or the bylaws of the Company;

ii. issue or sell or authorize for issuance or sale (other than any issuance of Company Capital Stock upon theexercise of any outstanding option or warrant to purchase Company Capital Stock which option or warrantwas issued prior to the date hereof in accordance with the terms of the relevant stock option or warrantagreement and the terms of which are disclosed on Schedule 2.3 or which are subsequently issued inaccordance with the succeeding limitations of this Section 5.2(ii)), or grant any options or make otheragreements with respect to, any shares of its capital stock or any other of its securities, except for stockoptions to purchase Company Common Stock which may be granted to non-executive employees under theCompany�s Stock Plan in accordance with past practices (including promotion and new hire grants), providedthat (A) the exercise price per share of each such option is not less than the greater of the Common Per ShareConsideration and fair market value per share of Company Common Stock on the grant date, and (B) optionsfor no more than 255,123 shares of Company Common Stock are issued in the aggregate pursuant hereto;

iii. declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwisewith respect to any of its capital stock;

iv. reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of itscapital stock except for repurchases of unvested shares in connection with the termination of any employeepursuant to stock option or purchase agreements disclosed on Schedule 2.3;

v. incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, orotherwise as an accommodation become responsible for, the obligations of any Person, or make any loans oradvances, except for borrowings pursuant to section 5.13 of the Merger Agreement and the Interim Note.

vi. acquire (including, without limitation, by merger, consolidation, or acquisition of stock or Assets) anycorporation, partnership, other business organization or any division thereof or any material amount of Assets;

vii. enter into any contract or agreement other than contracts or agreements entered into in the Ordinary Course ofBusiness consistent with past practice that (1) would not be required to be listed on Schedule 2.9 or 2.10 if ineffect on the date hereof or (2) are customer contracts; or

viii. authorize any capital commitment or capital lease which is in excess of $500,000 or capital expenditureswhich are, in the aggregate, in excess of $500,000;



ix. mortgage, pledge or subject to Encumbrance, any of its Assets or properties or agree to do so;

x. assume, guarantee or otherwise become responsible for the obligations of any other Person or agree to so do;

xi. enter into or agree to enter into or amend any employment agreement (other than offer letters and letteragreements with employees hired after the date hereof entered into in the Ordinary Course of Business);

xii. increase the compensation payable or to become payable to its directors, officers, employees or consultants, orgrant any severance or termination pay to, or enter into any severance agreement with any director, officer orother employee or consultant of the Company, or establish, adopt, enter into or amend any collectivebargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement,deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy orarrangement for the benefit of any such director, officer, employee or consultant, except that (A) the Companymay make reasonable salary increases in connection with the customary officer and employee performancereview process and pay customary bonuses consistent with past practices and (B) the Company may make anyamendments to existing employee benefit plans to the extent necessary to maintain their compliance withapplicable Laws;

xiii. take any action to change in any respect its accounting policies or procedures (including, without limitation,procedures with respect to the payment of accounts payable and collection of accounts receivables);

xiv. make any Tax election not required by law or settle or compromise any material federal, state, local or foreignincome Tax liability in excess of $50,000;

xv. commence any suit, or settle or compromise any pending or threatened, suit, action or claim;

xvi. pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted,contingent or otherwise), other than the payment, discharge or satisfaction, in the Ordinary Course of Businessand consistent with past practice, of liabilities reflected or reserved against in the latest balance sheet includedin the Financial Statements provided to Parent or subsequently reasonably incurred in the Ordinary Course ofBusiness and consistent with past practice;

xvii. sell, assign, transfer, license, sublicense, pledge or otherwise encumber any assets other than (1) the sale orlicense of products or inventory in the Ordinary Course of Business and consistent with past practice tocustomers (and the sublicense to such customers of the related Intellectual Property Right in connection withsuch sale or license of inventory, in each case in the Ordinary Course of Business and consistent with pastpractice) or (2) the sale or other transfer of tangible assets that are individually and in the aggregate deminimus;

xviii. amend any contract or agreement listed on Schedule 2.9, 2.10 or 2.15;

xix. unless the employees to be hired are within the Company�s head count plan for fiscal 2001, whichcontemplates 170 total Company personnel by December 31, 2001, hire any new employees without Parent�sconsent, which consent will not be unreasonably withheld; or

xx. announce an intention, commit or agree to do any of the foregoing.

SECTION 5.3 Access; Documents; Supplemental Information.

a. From and after the date hereof until the Closing, the Company shall afford, and, with respect to clause (ii)below, shall use its commercially reasonable efforts to cause the independent certified public accountants forthe Company to afford, (i) to the officers, independent certified public accountants, counsel and other



representatives of Parent and Merger Sub, upon reasonable notice, access at all reasonable times to theproperties, books and records including Tax Returns filed and those in preparation of the Company and theright to consult with the officers, employees, accountants, counsel and other representatives of the Companyin order that Parent and Merger Sub may have opportunity to make such investigations as it shall deemnecessary of the operations, properties, business, financial condition and prospects of the Company, (ii) to theindependent certified public accountants of Parent and Merger Sub, access at all reasonable times to the workpapers and other records of the accountants relating to the Company, and (iii) to Parent and Merger Sub andtheir respective representatives, such additional financial and operating data and other information as to theproperties, operations, business, financial condition and prospects of the Company as Parent and Merger Subshall from time to time reasonably require; provided that all requests for information, to visit offices orproperties or to interview the Company�s officers, employees, accountants, counsel or other representativesshall be directed to and coordinated with the Company�s CEO, or such person or persons as the Companyshall designate; provided further that any information and documents received by Parent or its representatives(whether furnished before or after the date of this Agreement) shall be held in strict confidence in accordancewith the Confidentiality and Non-Disclosure Agreement, dated July 24, 2001, as amended, between theCompany and Parent (the �Confidentiality Agreement�), which shall remain in full force and effect pursuantto the terms thereof as though the Confidentiality Agreement had been entered into by the parties on the dateof this Agreement, notwithstanding the execution and delivery of this Agreement or the termination hereof.

b. From the date of this Agreement through and including the Closing, the Company will furnish to Parent copiesof any notices, documents, requests, court papers, or other materials received from any governmental agencyor any other third party with respect to the transactions contemplated by this Agreement.

SECTION 5.4 No Solicitation. The Company shall not, nor shall it authorize or permit any of its Affiliates orany officer, director, employee, investment banker, attorney or other adviser or representative of the Company orany of its Affiliates to (a) solicit, initiate, or encourage the submission of, any Acquisition Proposal (as hereinafterdefined), (b) enter into any agreement with respect to any Acquisition Proposal or (c) participate in any discussionsor negotiations regarding, or furnish to any Person any information for the purpose of facilitating the making of, ortake any other action to facilitate any inquiries or the making of, any proposal that constitutes, or may reasonablybe expected to lead to, any Acquisition Proposal other than the transactions contemplated hereby; provided, however,that nothing contained in this Agreement shall prevent the Company or its Board of Directors at any time prior tothe time the Merger has been approved by the Company�s stockholders from: (a) providing information in responseto a request therefor by a Person who has delivered to the Board of Directors of the Company an unsolicited bonafide written Acquisition Proposal if the Board of Directors of Company receives from the Person so requesting suchinformation an executed confidentiality agreement the terms of which are (without regard to the terms of the AcquisitionProposal) (i) no less favorable to the Company and (ii) no less restrictive on the Person requesting such informationthan those contained in the Confidentiality Agreement; or (b) engaging in negotiations or discussions with a Personwho has delivered to the Board of Directors of the Company an unsolicited bona fide written Acquisition Proposal;if, and only to the extent that, in each such case referred to in clause (a) or (b) above, (x) the Board of Directors ofthe Company determines in good faith (after reviewing the advice of its financial advisor and outside legal counsel)that the Acquisition Proposal, if accepted, is likely to be consummated, (y) the Board of Directors of the Companydetermines in good faith (after reviewing the advice of its financial adviser) that the Acquisition Proposal would, ifconsummated, result in a transaction that is more favorable to the Company�s stockholders (with respect to financialterms) than the Merger (any Acquisition Proposal as to which such determinations are made being referred to in thisAgreement as a �Superior Proposal�) and (z) the Board of Directors determines in good faith (after receiving adviceof outside legal counsel) that taking such action is required in the exercise of its fiduciary duties under applicable law.Without limiting the foregoing, it is understood that any violation of the restrictions set forth in this Section 5.4 by anyofficer, director, employee, investment banker, attorney, employee, or other adviser or representative of the Companyor any of its Affiliates, whether or not such Person is purporting to act on behalf of the Company or any of its Affiliatesor otherwise, shall be deemed to be a breach of this Section 5.4 by the Company and its Affiliates. Nothing in thisSection 5.4 shall permit the Company to enter into any agreement, orally or in writing, with respect to an Acquisition



Proposal during the term of this Agreement (other than a confidentiality agreement as described above). �AcquisitionProposal� means any proposal for a merger or other business combination involving the Company or any proposal oroffer to acquire in any manner, directly or indirectly, 10% or more (for purposes of this Section 5.4) or 20% or more(for purposes of Section 8.4) of the equity securities, voting securities or Assets of the Company (except in connectionwith employee stock option grants or exercises or warrant exercises to the extent such warrant is listed on Schedule 2.3).The Company will, and except as otherwise provided in this Agreement, will cause its Affiliates to, immediately ceaseand cause to be terminated any activities, discussions or negotiations existing as of the date of this Agreement with anyPersons (other than Parent and its representatives) conducted heretofore with respect to any Acquisition Proposal, andwill not pursue, directly or indirectly, any Acquisition Proposal received on or prior to the date of this Agreement fromany Person (other than Parent and its representatives).

The Company shall advise Parent orally (within one business day) and in writing (as promptly as practicable) of (i)any Acquisition Proposal or any inquiry with respect to or which could lead to any Acquisition Proposal, (ii) the materialterms of such Acquisition Proposal and (iii) the identity of the Person making any such Acquisition Proposal or inquiry.The Company will keep Parent fully informed of the status and details of any such Takeover Proposal or inquiry.

During the period from the date of this Agreement through the Effective Time, the Company shall not terminate,amend, modify or waive any provision of any confidentiality agreement relating to an Acquisition Proposal or standstillagreement to which the Company is a party (other than any involving Parent). During such period, the Company agreesto enforce, to the fullest extent permitted under applicable law, the provisions of any such agreements, including, but notlimited to, injunctions to prevent any breaches of such agreements and to enforce specifically the terms and provisionsthereof in any court of the United States or any state thereof having jurisdiction.

SECTION 5.5 Stockholder Meeting.

a. Whether or not the Board of Directors of the Company shall take any action permitted by the third sentence ofthis Section 5.6, the Company shall cause a meeting of its stockholders (the �Stockholders� Meeting�) to beduly called and held as soon as practicable after the date of this Agreement for the purpose of voting on theadoption of this Agreement or shall solicit written consents of stockholders for such purpose. The Board ofDirectors of the Company shall (i) include in the Information Statement (defined below) prepared therefor itsrecommendation in favor of adoption of the Merger Agreement (the �Board Recommendation�) and (ii) usecommercially reasonable efforts to obtain the necessary vote in favor of the adoption of this Agreement by itsstockholders. The Board of Directors of the Company shall not withdraw, amend, modify or qualify in amanner adverse to Parent the Board Recommendation (or announce its intention to do so), except that, prior tothe receipt of the Company Requisite Vote, the Board of Directors of the Company shall be permitted towithdraw, amend, modify or materially qualify in a manner adverse to Parent the Board Recommendation,following three Business Days� prior notice to Parent, but only if (A) the Company has complied in allrespects with this Agreement, including Section 5.4, and (B) after receiving advice of its outside legal counsel,the Board of Directors determines in good faith that the Merger is not in the best interests of the stockholdersof the Company and that, therefore, it is required to withdraw, amend or modify the Board Recommendationin order to satisfy its fiduciary duties to the stockholders of the Company under applicable law.

b. As soon as practicable after the date hereof, the Company shall prepare, with the cooperation of Parent, aninformation statement for the stockholders of the Company (the �Information Statement�) to approve thisAgreement, the Merger and the transactions contemplated hereby and thereby. Parent and the Company shalleach use its reasonable best efforts to cause the Information Statement to comply with applicable federal andstate securities laws requirements. Each of Parent and the Company agrees to provide promptly to the othersuch information concerning its business and financial statements and affairs as, in the reasonable judgment ofthe providing party or its counsel, may be required or appropriate for inclusion in the Information Statement,or in any amendments or supplements thereto, and to cause its counsel and auditors to cooperate with theother�s counsel and auditors in the preparation of the Information Statement. The Company shall promptly



advise Parent, and Parent shall promptly advise the Company, in writing if at any time prior to the EffectiveTime either the Company or Parent shall obtain knowledge of any facts that might make it necessary orappropriate to amend or supplement the Information Statement in order to make the statements contained orincorporated by reference therein not misleading or to comply with applicable law. The Information Statementshall contain the Board Recommendation. Notwithstanding anything to the contrary contained herein, theCompany shall not include in the Information Statement any information which information shall not havebeen approved by Parent prior to such inclusion.

SECTION 5.6 Filings; Other Actions; Notification. The Company and Parent each shall from the date hereof untilthe Effective Time cooperate with the other and use its commercially reasonable efforts to cause to be done all thingsnecessary, proper or advisable on its part under this Agreement and applicable Laws to consummate and make effectivethe Merger and the other transactions contemplated by this Agreement as soon as practicable, including preparing andfiling as promptly as practicable all documentation to effect all necessary notices, reports and other filings and to obtainas promptly as practicable all consents, registrations, approvals, permits and authorizations necessary or advisable to beobtained from any third party and/or any Governmental Entity, including filings under the Hart-Scott-Rodino Act, inorder to consummate the Merger or any of the other transactions contemplated by this Agreement.

SECTION 5.7 Information. The Company and Parent each shall keep the other apprised of the status of mattersrelating to completion of the transactions contemplated hereby.

SECTION 5.8 NASDAQ Listing. As soon as practicable after the Effective Time, Parent shall list on NASDAQthe shares of Parent Common Stock to be issued upon exercise of Substitute Options.

SECTION 5.9 Company Stock Options; Company Warrants.

a. Concurrent with the Effective Time, each stock option to purchase Company Common Stock (the �CompanyStock Options�) which is outstanding immediately prior to the Effective Time pursuant to the Company�sStock Plan shall together with each such Stock Plan, be assumed by Parent and shall thereby be converted intoan option (an �Assumed Option�) to purchase the number of shares of Parent Common Stock (decreased to thenearest full share) determined by multiplying (i) the number of shares of Company Common Stock subject tosuch Company Stock Option immediately prior to the Effective Time by (ii) the Common Stock ExchangeRatio, at an exercise price per share of Parent Common Stock (increased to the nearest whole cent) equal tothe exercise price per share of Company Common Stock in effect under such Company Stock Optionimmediately prior to the Effective Time divided by the Common Stock Exchange Ratio. Except for theforegoing adjustments, all the terms and conditions in effect for each Assumed Option immediately prior tothe Effective Time shall continue in effect following the assumption of such option in accordance with thisAgreement. The Company agrees that it will not grant any stock appreciation rights or limited stockappreciation rights and will not permit cash payments to holders of Company Stock Options in lieu of thesubstitution therefor of Assumed Options. The Company shall take all actions necessary to assure that noacceleration of vesting of Assumed Options shall occur solely as a result of the Merger.

b. It is the intention of the parties that the Company Stock Options so assumed by Parent shall qualify,immediately after the Effective Time, as �Incentive Stock Options� under Section 422 of the Code to the sameextent those options qualified as such Incentive Stock Options immediately prior to the Effective Time.Accordingly, the adjustments provided herein with respect to any Company Stock Options that are IncentiveStock Options shall be and are intended to be effected in a manner which is consistent with Section 424(a) ofthe Code.

c. Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of ParentCommon Stock for delivery upon the exercise of the Assumed Options. As soon as practicable after theEffective Time, Parent shall deliver to the holders of Company Stock Options appropriate notices to the effect



that such Assumed Options shall continue in effect on the same terms and conditions as the Company StockOptions (subject to the adjustment set forth in this Section 5.10).

d. As soon as practicable after the Effective Time, Parent shall prepare and file with the SEC a registrationstatement on Form S-8 (or another appropriate form) registering a number of shares subject to the AssumedOptions. Such registration statement shall be kept effective (and the current status of the prospectus requiredthereby shall be maintained in accordance with the relevant requirements of the Securities Act and theExchange Act) at least for so long as any Assumed Options remain outstanding.

e. Concurrent with the Effective Time, each warrant to purchase Company Capital Stock that is then outstandingand exercisable as described in Schedule 2.3 (each, a �Company Warrant�), without any action on the part ofthe holder, shall be deemed assumed by Parent and shall constitute a warrant to acquire, on the same termsand conditions as were applicable under such Company Warrant, cash equivalent to (A) the number of sharesof Company Capital Stock that could have been purchased immediately prior to the Effective Time under suchCompany Warrant multiplied by (B) the Common Per Share Consideration, in the case of a Company Warrantto acquire Company Common Stock, or the Series B Per Share Consideration, in the case of a CompanyWarrant to acquire Series B Preferred Stock, at a price equal to the exercise price per share pursuant to suchCompany Warrant immediately prior to the Effective Time. At or prior to the Effective Time, the Companyshall use commercially reasonable efforts to cause the exercise of the Company Warrants no later than theEffective Time.

f. Concurrent with the Effective Time, the cash consideration into which each unvested outstanding share ofrestricted Company Common Stock is converted pursuant hereto shall remain subject to the vestingrequirements applicable to such share under the applicable restricted stock agreement. Prior to the EffectiveTime, the Company will take all action necessary to give effect to the provisions of this Section 5.9(f) and toassure that no acceleration of vesting of unvested shares of restricted Company Common Stock shall occursolely as a result of the Merger.

SECTION 5.10 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shallgive prompt notice to the Company, of (a) the occurrence, or non-occurrence, of any event which would be likely tocause (i) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respector (ii) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied; and (iii)any failure of the Company, Parent or Merger Sub, as the case may be, to comply with or satisfy any covenant, conditionor agreement to be complied with or satisfied by it hereunder; provided that the delivery of any notice pursuant to thisSection 5.10 shall not limit or otherwise affect the remedies available to the party receiving such notice.

SECTION 5.11 Indemnification. From and after the Effective Time for not less than (i) six years, in the case ofacts or omissions under or pursuant to Section 174 of the DCGL and Section 8109 of Title 10 of the Delaware CodeAnnotated, and (ii) four years for all other acts or omissions, after the Effective Time, Parent shall fulfill and honor inall respects the obligations of the Company to indemnify each person who is or was a director or officer of the Companyagainst losses such person may incur based upon matters existing or occurring prior to the Effective Time pursuantto any applicable indemnification agreements described in Schedule 2.10(b) and any indemnification and exculpationprovision of the Company Certificate or its bylaws as each is in effect on the date hereof. Parent will cause to bemaintained for a period of not less than four years from the Effective Time the Company�s current directors� andofficers� insurance and indemnification policy to the extent that it provides coverage for events occurring prior to theEffective Time for all persons who are directors and officers of the Company on the date of this Agreement, providedthat in satisfying its obligation under this Section, Parent shall not be obligated to pay premiums in excess of 150% ofthe amount per annum the Company paid in its last full fiscal year, which amount has been disclosed to Parent, and ifParent is unable to obtain the insurance required by this Section 5.11, it shall obtain as much comparable insurance aspossible for an annual premium equal to such maximum amount.



SECTION 5.12 Actions by the Parties. Upon the terms and subject to the conditions set forth in this Agreement,each of the parties hereto will use its commercially reasonable efforts to take or cause to be taken all actions, and to do,or cause to be done, all things necessary, proper or advisable under applicable law and regulations to consummate andmake effective in the most expeditious manner practicable, the transactions contemplated by this Agreement including(i) obtaining all necessary actions and non-actions, waivers and consents, if any, from any governmental agency orauthority and the making of all necessary registrations and filings and the taking of all reasonable steps as may benecessary to obtain an approval or waiver from, or to avoid an action or proceeding by any governmental agency orauthority; (ii) obtaining all necessary consents, approvals or waivers from any other Person; (iii) defending any claim,investigation, action, suit or other legal proceeding, whether judicial or administrative, challenging this Agreementor the consummation of the transactions contemplated hereby; and (iv) executing additional instruments necessary toconsummate the transactions contemplated by this Agreement. Each party will promptly consult with the other andprovide necessary information (including copies thereof) with respect to all filings made by such party with the anyagency or authority in connection with this Agreement and the transactions contemplated hereby. The Company willcause the Stockholders� Representatives (or, if an individual named herein as a Stockholder Representative is unableor unwilling to serve in such capacity, a replacement Stockholders� Representative) to execute and deliver to Parentand the Escrow Agent the Escrow Agreement prior to the Effective Time. Each party shall use all commerciallyreasonable efforts to not take any action, or enter into any transaction, which would cause any of its representationsor warranties contained in this Agreement to be untrue or result in a breach of any covenant made by it in thisAgreement. Notwithstanding anything to the contrary contained in this Agreement, in connection with any filing orsubmission required or action to be taken by either Parent or the Company relating to this Agreement or the transactionscontemplated hereby, (i) neither Parent nor any of its Affiliates shall be required to divest or hold separate or otherwisetake or commit to take any action that limits its freedom of action with respect to, or its ability to retain, the Company orany of the businesses, product lines or assets of Parent, the Company or any of their respective Subsidiaries or Affiliates,or that otherwise would have an adverse effect in any material respect on Parent or the Company and (ii) the Companyshall not, and shall not permit any of its Affiliates to, take or agree to take any such action without Parent�s prior writtenconsent.

SECTION 5.13 Interim Financing. Parent hereby agrees to lend to the Company at any time and from time to timeafter the date hereof and before the Termination Date (each a �Loan� and collectively the �Loans�) up to a principalamount of $10,000,000.00 in immediately available funds; provided that Parent shall not be obligated to make anyLoans to the Company (1) upon the termination of this Agreement in accordance with its terms, (2) if the Companyis in breach in any material respect of any of its obligations hereunder and such breach has not been cured, (3) ifthe Company breaches in any material respect its obligations under Section 5.4 or (4) if the Company is in breach inany material respect of any of its obligations under the Interim Note and such breach has not been cured (each of thecircumstances set forth in clauses (2), (3) and (4) above, a �Loan Default�). Each Loan shall be in an amount of atleast $1,000,000. The Loans shall be evidenced by a single Promissory Note, in the form of Exhibit B attached hereto(the �Interim Note�), executed by the Company on the date of this Agreement and payable to the order of Parent in anamount equal to the unpaid principal amount of the Loans. The Loans are not revolving in nature and no Loan may bereborrowed once it has been repaid. The Company shall give Parent at least five Business Days� irrevocable writtennotice of the Company�s intention to receive a Loan from Parent. Such notice shall specify the amount of the Loan,the date on which the Loan will be made by Parent and the wire transfer instructions for the Company bank account towhich Parent shall transfer an amount of funds equal to the full amount of such Loan, and shall certify that, as of thedate of such notice, no Loan Default exists. The Company�s acceptance of any Loan shall constitute the Company�sreaffirmation that as of the date of such Loan, no Loan Default exists. Subject to the proviso in the first sentence of thisSection 5.13, Parent shall make such Loan in accordance with such notice. All of the other terms relating to the Loansare set forth in the Interim Note.

SECTION 5.14 Employment Agreements. Promptly following the date of this Agreement, Parent, in consultationwith the Company, shall identify, in good faith, key employees of the Company whom it desires to enter into theemployment agreements contemplated by Section 6.2(i). Parent agrees to use reasonable commercial efforts to negotiate



such employment agreements with such employees as soon as reasonably practicable after such identification. TheCompany agrees to use its reasonable best efforts to assist Parent with respect to the foregoing.

ARTICLE VI

Conditions Precedent

SECTION 6.1 Conditions Precedent to Each Party�s Obligation to Effect the Merger. The respective obligationsof each party hereto to effect the Merger shall be subject to the fulfillment or satisfaction, prior to or on the ClosingDate of the following conditions:

a. Approvals. All authorizations, consents, orders, declarations or approvals of, or filings with, or terminations orexpirations of waiting periods imposed by (including without limitation, expiration of any Hart-Scott-Rodinowaiting period), any Governmental Entity, which the failure to obtain, make or occur would have the effect ofmaking the Merger or any of the transactions contemplated hereby illegal or would have a Parent MaterialAdverse Effect or a Company Material Adverse Effect, assuming the Merger had taken place, shall be ineffect.

b. No Injunction. No temporary restraining order, preliminary or permanent injunction or other order from anycourt of competent jurisdiction or other Governmental Entity prohibiting or preventing the consummation ofthe Merger or any of the transactions contemplated hereunder shall be in effect.

c. Stockholder Approval. The Merger shall have been duly approved by holders of Company Capital Stock asrequired by the Company Certificate and the DGCL.

SECTION 6.2 Conditions Precedent to Obligations of Parent. The obligations of Parent to effect the Mergershall be subject to the fulfillment or satisfaction, prior to or on the Closing Date, of each of the following conditionsprecedent:

a. Performance of Obligations; Representations and Warranties. The Company shall have performed in allmaterial respects and complied in all material respects with all agreements and conditions contained in thisAgreement that are required to be performed or complied with by it prior to or at the Closing. Each of theCompany�s representations and warranties contained in Article II of this Agreement (A) which is notqualified by materiality shall be true and correct in all material respects and (B) which is qualified bymateriality shall be true and correct, in each case, on and as of the Closing with the same effect as though suchrepresentations and warranties were made on and as of the Closing, except for changes permitted by thisAgreement and except to the extent that such representations and warranties expressly relate to an earlier date,in which case such representations and warranties shall be as of such earlier date. Parent shall have received acertificate dated the Closing Date and signed by the Chairman, President or a Vice-President of the Company,certifying that, the conditions specified in this Section 6.2(a) have been satisfied.

b. Consents. The Company shall have received consents or waivers, in form and substance reasonablysatisfactory to Parent, from the other parties to the contracts, leases or agreements to which the Company is aparty and which are set forth on Schedule 6.2(b).

c. Termination of Agreements. The Investor Rights Agreements shall be inapplicable to this transaction and shallhave been terminated.

d. Escrow Agreement. The Company, the Escrow Agent and the Stockholder Representatives shall haveexecuted and delivered the Escrow Agreement, in the case of the Stockholders� Representatives, on behalf ofall stockholders other than the holders of Dissenting Shares.



e. No Litigation or Injunction. There shall not be instituted or pending any suit, action or proceeding by anyGovernmental Entity relating to this Agreement or any of the agreements contemplated hereby or any of thetransactions contemplated herein or therein.

f. FIRPTA Certificate. The Company shall have delivered, at the Closing Date, a statement in accordance withTreas. Reg. Sections 1.1445-2(c)(3) and 1.897-2(h) certifying that the Company is not, and has not been, a�United States real property holding corporation� for purposes of Section 897 and 1445 of the Code and theCompany shall not have actual Knowledge that such a statement is false or have received a notice that thestatement is false pursuant to Treas. Reg. Section 1.445.

g. Capital Structure Certificate. The Company shall have delivered a certificate of its Chief Executive Officerand its Chief Financial Officer setting forth all of the information that would have been required to have beenincluded in Schedule 2.3 dated as of the Effective Time.

h. Dissenting Shares. Holders of shares of Company Capital Stock representing in excess of 95.0% of the issuedand outstanding Company Capital Stock immediately prior to the Effective Time shall have effectively waived(by voting for, or consenting to, the adoption of this Agreement or otherwise ) their appraisal rights underSection 262 of the DGCL.

i. Employment Agreements. Each of the key employees of the Company identified by Parent pursuant to Section5.14 shall have entered into an employment agreement with Parent or the Company, as Parent shall designate,which employment agreement shall be in form and substance reasonably acceptable to Parent, taking intoconsideration industry norms, such employee�s current position with the Company and such employee�scurrent terms of employment, and such other reasonable factors as Parent shall deem appropriate.

SECTION 6.3 Conditions Precedent to the Company�s Obligations. The obligations of the Company to effect theMerger shall be subject to the fulfillment or satisfaction, prior to or on the Closing Date, of each of the followingconditions precedent:

a. Performance of Obligations; Representations and Warranties. Parent and Merger Sub shall have performed inall material respects and complied in all material respects with all agreements and conditions contained in thisAgreement that are required to be performed or complied with by them prior to or at the Closing. Each of therepresentations and warranties of Parent and Merger Sub contained in Articles III and IV of this Agreement(A) which is not qualified by materiality shall be true and correct in all material respects and (B) which isqualified by materiality shall be true and correct, in each case, on and as of the Closing with the same effect asthough such representations and warranties were made on and as of the Closing except for changes permittedby this Agreement and except to the extent that such representations and warranties expressly relate to anearlier date, in which case such representations and warranties shall be as of such earlier date. The Companyshall have received certificates dated the Closing Date and signed by the Chairman, President or a SeniorVice-President of Parent, certifying that the conditions specified in this Section 6.3(a) have been satisfied.

b. Escrow Agreement. Parent and Merger Sub shall have executed and delivered the Escrow Agreement.

ARTICLE VII

Survival of Representations and Warranties;

SECTION 7.1 Survival of Representations and Warranties. All of the Company�s, Parent�s and Merger Sub�srepresentations and warranties representations and warranties in this Agreement or in any instrument delivered pursuantto this Agreement shall survive the Merger and continue until the date which is one year following the Closing Date,except to the extent a claim for indemnification shall be pending with respect thereto in accordance with this Article VIIand the Escrow Agreement.



SECTION 7.2 Indemnification; Escrow Agreements.

a. Indemnification. Parent, Merger Sub and their respective officers, directors and affiliates (the �IndemnifiedParties�) shall be indemnified and held harmless by the Stockholders (other than those dissentingstockholders exercising rights of appraisal under Section 262 of the DGCL who do not receive a cash paymentin the Merger pursuant to Article I) against all claims, losses, liabilities, damages, deficiencies, costs andexpenses, including reasonable attorneys� fees and expenses of investigation (hereinafter individually a�Loss� and collectively �Losses�) incurred by the Indemnified Parties directly or indirectly as a result of: (i)any inaccuracy or breach of a representation or warranty of the Company contained in this Agreement orcontained in a certificate of any officer of the Company delivered pursuant to this Agreement, or (ii) anyfailure by the Company to perform or comply with any covenant or agreement contained in this Agreement.The Stockholders shall not have any right of contribution from the Company with respect to any Loss claimedby any Indemnified Party after the Effective Time.

b. Indemnification Threshold and Limitations.

i. Except as set forth below, there shall be no liability for any Stockholder under Section 7.2 unless theaggregate amount of Losses incurred by the Indemnified Parties exceeds $1,000,000 (the�Indemnification Threshold�) in the aggregate, in which event the entire aggregate amount of theLosses shall be indemnifiable pursuant to Section 7.2(a).

ii. The Indemnified Parties sole and exclusive remedy for any inaccuracy or breach of a representation orwarranty of the Company or any failure by the Company to perform or comply with any covenant andagreement in this Agreement or any agreement, instrument or certificate delivered pursuant to or inconnection therewith shall be indemnification pursuant to this Article VII. The liability of theStockholders under and the right of the Indemnified Parties to seek such indemnification shall belimited solely and exclusively to the Escrow Amount (as defined in Section 1.8(b)).

c. Satisfaction of Indemnification Obligations; Escrow Fund. Each of the Stockholders receiving considerationin the Merger pursuant to Article I will be deemed to have received and deposited with the Escrow Agent (asdefined below) its pro rata portion of the Escrow Amount so deposited. The Escrow Amount will be depositedwith and will be held by a financial institution designated by Parent and reasonably acceptable to theStockholders� Representatives (as defined in Section 7.3) as Escrow Agent (the �Escrow Agent�), suchdeposit to constitute an escrow fund (the �Escrow Fund�) to be governed by the terms set forth in the EscrowAgreement. Payment of any Loss from the Escrow Amount shall be taken ratably from the Escrow Fund (asdefined in the Escrow Agreement).

SECTION 7.3 Stockholders� Representatives.

a. Appointment. In the event the Stockholders approve the Merger, effective upon such vote and without anyfurther action by the Stockholders, Edward H. Kennedy and Rob L. Soni will each be appointed as agent andattorney-in-fact (the �Stockholders� Representatives�) for each Stockholder receiving consideration in theMerger pursuant to Article I, for and on behalf of the Stockholder. The Stockholders� Representatives shallhave full power and authority to represent all of the Stockholders and their successors with respect to allmatters arising under this Agreement and the Escrow Agreement and all actions taken by the Stockholders�Representatives hereunder and thereunder shall be binding upon all such Stockholders and their successors asif expressly confirmed and ratified in writing by each of them. The Stockholders� Representatives shall takeany and all actions which they believe are necessary or appropriate under this Agreement and the EscrowAgreement for and on behalf of the Stockholders, as fully as if the Stockholders were acting on their ownbehalf, including, without limitation, defending all indemnity claims against the Stockholders pursuant toSection 7.2 of this Agreement (an �Indemnity Claim�), consenting to, compromising or settling all Indemnity



Claims, conducting negotiations with Parent and its agents regarding such claims, dealing with Parent and theEscrow Agent under this Agreement and the Escrow Agreement with respect to all matters arising under thisAgreement and the Escrow Agreement, taking any and all other actions specified in or contemplated by thisAgreement and the Escrow Agreement, and engaging counsel, accountants or other Stockholders�Representatives in connection with the foregoing matters. Without limiting the generality of the foregoing, theStockholders� Representatives shall have full power and authority to interpret all the terms and provisions ofthis Agreement and the Escrow Agreement and to consent to any amendment hereof or thereof on behalf of allsuch Stockholders and such successors. Notwithstanding the foregoing, no Stockholders� Representative shallbe authorized to take any actions under or pursuant to this Agreement without the prior consent of the otherStockholders� Representative.

b. Indemnification of Stockholders� Representatives. The Stockholders� Representatives may act upon anyinstrument or other writing believed by the Stockholders� Representatives in good faith to be genuine and tobe signed or presented by the proper person and shall not be liable in connection with the performance by himof his duties pursuant to the provisions of the Escrow Agreement, except for his own willful default or grossnegligence. The Stockholders� Representatives shall be, and hereby are, indemnified and held harmless,jointly and severally, by the Stockholders from all losses, costs and expenses (including attorneys� fees) thatmay be incurred by the Stockholders� Representatives as a result of the Stockholders� Representatives�performance of their duties under this Agreement and the Escrow Agreement, provided that the Stockholders�Representatives shall not be entitled to indemnification for losses, costs or expenses that result from anyaction taken or omitted by the Stockholders� Representatives as a result of his willful default or grossnegligence and provided, further, that each Stockholder�s obligation to indemnify the Stockholders�Representatives under this Agreement and the Escrow Agreement shall be limited to, and payable only from,each Shareholder�s pro rata interest in the Escrow Account and cash available, if any, to the Stockholdersunder the Escrow Agreement. The Escrow Agent shall from time to time pay such Stockholders�Representatives� costs and expenses, to the extent required by the preceding sentence.

c. Access to Information. The Stockholders� Representatives shall have reasonable access to information of andconcerning any Indemnity Claim and which is in the possession, custody or control of the Company and thereasonable assistance of the Company�s officers and employees for purposes of performing the Stockholders�Representatives� duties under this Agreement or the Escrow Agreement and exercising their rights under thisAgreement and the Escrow Agreement, including for the purpose of evaluating any Indemnity Claim againstthe Escrow Shares by Parent; provided that the Stockholders� Representatives shall treat confidentially andnot disclose any nonpublic information from or concerning any Indemnity Claim to anyone (except to theStockholders� Representatives� attorneys, accountants or other advisers, to Stockholders, to the arbitratorsappointed to resolve disputes pursuant to this Agreement, and on a need-to-know basis to other individualswho agree to keep such information confidential pursuant to confidentiality agreements reasonably acceptableto Parent to evidence such obligations.

d. Reasonable Reliance. In the performance of their duties hereunder, the Stockholders� Representatives shall beentitled to rely upon any document or instrument reasonably believed by him to be genuine, accurate as tocontent and signed by any Stockholder or Parent. The Stockholders� Representatives may assume that anyperson purporting to give any notice in accordance with the provisions hereof has been duly authorized to doso.

e. Attorney-in-Fact.

i. The Stockholders� Representatives are hereby appointed and constituted the true and lawful attorney-in-fact of each Stockholder, with full power in their name and on their behalf to act according to theterms of this Agreement and the Escrow Agreement in the absolute discretion of the Stockholders�Representatives; and in general to do all things and to perform all acts including, without limitation,



executing and delivering the Escrow Agreement and any other agreements, certificates, receipts,instructions, notices or instruments contemplated by or deemed advisable in connection with theEscrow Agreement.

ii. This power of attorney and all authority hereby conferred is granted and shall be irrevocable and shallnot be terminated by any act of any Stockholder, by operation of law, whether by such Stockholder�sdeath, disability protective supervision or any other event. Without limitation to the foregoing, thispower of attorney is to ensure the performance of a special obligation and, accordingly, eachStockholder hereby renounces its, his or her right to renounce this power of attorney unilaterally anytime before the end of the Escrow Period (as such term is defined in the Escrow Agreement).

iii. Each Stockholder waives any and all defenses which may be available to contest, negate or disaffirmthe action of the Stockholders� Representatives taken in good faith under the Escrow Agreement.

iv. Notwithstanding the power of attorney granted in this Section 7.3, no agreement, instrument,acknowledgement or other act or document shall be ineffective by reason only of the Stockholdershaving signed or given such directly instead of the Stockholders� Representatives.

e. Liability. If the Stockholders� Representatives are required by the terms of the Escrow Agreement todetermine the occurrence of any event or contingency, the Stockholders� Representatives shall, in makingsuch determination, be liable to the Stockholders only for their proven bad faith as determined in light of allthe circumstances, including the time and facilities available to him in the ordinary conduct of business. Indetermining the occurrence of any such event or contingency, the Stockholders� Representatives may requestfrom any of the Stockholders or any other person such reasonable additional evidence as the Stockholders�Representatives in their sole discretion may deem necessary to determine any fact relating to the occurrence ofsuch event or contingency, and may at any time inquire of and consult with others, including any of theStockholders, and the Stockholders� Representatives shall not be liable to any Stockholder for any damagesresulting from his delay in acting hereunder pending his receipt and examination of additional evidencerequested by him.

f. Orders. The Stockholders� Representatives are authorized, in their sole discretion, to comply with final,nonappealable orders or decisions issued or process entered by any court of competent jurisdiction orarbitrator with respect to the Escrow Fund. If any portion of the Escrow Fund is disbursed to theStockholders� Representatives and is at any time attached, garnished or levied upon under any court order, orin case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed orenjoined by any court order, or in case any order, judgment or decree shall be made or entered by any courtaffecting such property or any part thereof, then and in any such event, the Stockholders� Representatives areauthorized, in their sole discretion, but in good faith, to rely upon and comply with any such order, writ,judgment or decree which he is advised by legal counsel selected by him is binding upon him without the needfor appeal or other action; and if the Stockholders� Representatives comply with any such order, writ,judgment or decree, he shall not be liable to any Stockholder or to any other Person by reason of suchcompliance even though such order, writ, judgment or decree may be subsequently reversed, modified,annulled, set aside or vacated.

g. Removal of Stockholders� Representatives; Authority of Successor Stockholders� Representatives.Stockholders who in the aggregate hold at least a majority of the Stockholders� interest in the Escrow Sharesshall have the right at any time during the term of the Escrow Agreement to remove the then-actingStockholders� Representatives and to appoint successor Stockholders� Representatives; provided, however,that neither such removal of the then acting Stockholders� Representatives nor such appointment of successorStockholders� Representatives shall be effective until the delivery to the Escrow Agent of executedcounterparts of a writing signed by each such Stockholder with respect to such removal and appointment,



together with an acknowledgment signed by the successor Stockholders� Representatives appointed in suchwriting that he or she accepts the responsibility of successor Stockholders� Representatives and agrees toperform and be bound by all of the provisions of this Agreement applicable to the Stockholders�Representatives. Each successor Stockholders� Representative shall have all of the power, authority, rightsand privileges conferred by this Agreement upon the original Stockholders� Representatives, and the term�Stockholders� Representatives� as used herein and in the Escrow Agreement shall be deemed to include anyinterim or successor Stockholders� Representatives.

SECTION 7.4 Defense of Third Party Claims.

a. In the event of the assertion or commencement by any Person of any claim or legal proceeding (�LegalProceeding�) (whether against the Company, against any other indemnitee or against any other Person) withrespect to which any of the Stockholders may become obligated to indemnify, hold harmless, pay, compensateor reimburse Parent, their officers, directors or affiliates (�Parent Indemnitee�) pursuant to this Article VII, (i)Parent, as soon as practicable after it receives written notice of any such claim or Legal Proceeding shallnotify the Stockholders� Representatives of such claim or Legal Proceeding (it being understood that thefailure to notify the Stockholders� Representatives shall not in any way limit the rights of the ParentIndemnitees under this Agreement unless such failure materially prejudices the rights or defenses available tothe Stockholders� Representatives), and (ii) the Stockholders� Representatives shall have the right toparticipate in the defense of such claim or Legal Proceeding at the sole expense of the Stockholders. If theStockholders� Representatives so participates in the defense of any such claim or Legal Proceeding, theStockholders� Representatives shall acknowledge in writing the obligation of the Stockholders to indemnifythe relevant Parent Indemnitee against any Losses that may result from such claim or Legal Proceeding.

b. Parent shall proceed with the defense of such claim or Legal Proceeding and:

i. all expenses relating to the defense of such claim or Legal Proceeding shall be borne and paidexclusively by the Stockholders in the manner and to the extent contemplated by the EscrowAgreement and Section 7.2 hereof;

ii. the Stockholders shall make available to Parent any documents and materials in the possession orcontrol of any of the Stockholders that may be necessary to the defense of such claim or LegalProceeding;

iii. Parent shall keep the Stockholders� Representatives informed of all material developments and eventsrelating to such claim or Legal Proceeding; and

iv. Parent shall not have the right to settle, adjust or compromise such claim or Legal Proceeding withoutthe prior written consent of the Stockholders� Representatives, provided, however, that theStockholders� Representatives shall not unreasonably withhold such consent.

ARTICLE VIII

Miscellaneous and General

SECTION 8.1 Public Announcements. Parent and Merger Sub, on the one hand, and the Company on the otherhand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon,any press release or other public statements with respect to the transactions contemplated by this Agreement, includingthe Offer and the Merger, and shall not issue any such press release or make any such public statement prior to suchconsultation, except as may be required by applicable law, court process or by obligations pursuant to any listingagreement with any national securities exchange. The parties agree that the initial press release to be issued with respectto the transactions contemplated by this Agreement will be in the form previously agreed to by the parties.



SECTION 8.2 Contents of Agreement; Parties in Interest; Etc. This Agreement and the agreements referred to orcontemplated herein and the Confidentiality Agreement set forth the entire understanding of the parties hereto withrespect to the transactions contemplated hereby, and, except as set forth in this Agreement, such other agreements andthe Exhibits hereto and the Confidentiality Agreement, there are no representations or warranties, express or implied,made by any party to this Agreement with respect to the subject matter of this Agreement and the ConfidentialityAgreement. Except for the matters set forth in the Confidentiality Agreement, any and all previous agreementsand understandings between or among the parties regarding the subject matter hereof, whether written or oral, aresuperseded by this Agreement and the agreements referred to or contemplated herein.

SECTION 8.3 Assignment and Binding Effect. This Agreement may not be assigned by either party hereto withoutthe prior written consent of the other party. All the terms and provisions of this Agreement shall be binding upon andinure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto.

SECTION 8.4 Termination.

a. Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at anytime prior to the Effective Time, whether before or after the approval by Stockholders of the Companyreferred to in Section 6.1(c), by mutual written consent of the Company and Parent.

b. Termination by Either Parent or the Company. This Agreement may be terminated and the Merger may beabandoned at any time prior to the Effective Time by action of the Board of Directors of either Parent or theCompany if (i) the Merger shall not have been consummated by March 31, 2002, whether such date is beforeor after the date of approval by the Stockholders of the Company (the �Termination Date�); or (ii) any Orderpermanently restraining, enjoining or otherwise prohibiting consummation of the Merger shall become finaland non-appealable; provided, that the right to terminate this Agreement pursuant to clause (i) above shall notbe available to any party that has breached in any material respect its obligations under this Agreement in anymanner that shall have caused the occurrence of the failure of the Merger to be consummated.

c. Termination by the Company. This Agreement may be terminated and the Merger may be abandoned at anytime prior to the receipt of the approval of the Company�s Stockholders required by Section 6.1(c), by actionof the Board of Directors of the Company, if it is not in material breach of its obligations under the Agreementand there is a breach by Parent or Merger Sub of any material representation, warranty, covenant or agreementcontained in this Agreement and such breach has not been cured within 30 days after written notice thereof toParent, or such breach cannot be cured, and would cause a condition set forth in Section 6.3(a) to be incapableof being satisfied.

d. Termination by Parent. This Agreement may be terminated and the Merger may be abandoned at any timeprior to the Effective Time, whether before or after the receipt of the approval of the Company�s Stockholdersrequired by Section 6.1(c), by written notice given to the Company by Parent:

i. if the Company or its Board of Directors shall have (A) withdrawn, modified or amended in anyrespect adverse to Parent its recommendation of the adoption of this Agreement (�Change in theBoard Recommendation�), or (B) approved, recommended or entered into an agreement with respectto, or consummated, or adopted a resolution to approve, recommend, enter into an agreement withrespect to, or consummate, any Acquisition Proposal from a person other than Parent or any of itsAffiliates;

ii. if it is not in material breach of its obligations under the Agreement and there is a breach by theCompany of any material representation, warranty, covenant or agreement contained in thisAgreement, or such breach has not been cured within 30 days after written notice thereof to theCompany and such breach cannot be cured and would cause a condition set forth in Section 6.2(a) tobe incapable of being satisfied; or



iii. if the approval of the Company�s stockholders required by Section 6.1(c) shall not have beenobtained at a meeting duly convened therefor or at any adjournment or postponement thereof orpursuant to written consents of stockholders of the Company; provided that Parent is not in materialbreach of this Agreement in any manner that shall have caused the stockholder approval to not havebeen obtained;

d. Effect of Termination and Abandonment. The following provisions shall apply in the event of this Agreementand the abandonment of the Merger:

i. In the event of termination of this Agreement and the abandonment of the Merger pursuant to thisSection 8.4, this Agreement (other than as set forth in this Section 8.4(e) and other than Sections 8.1and 8.16) shall become void and of no effect with no liability on the part of any party hereto (or ofany of its directors, officers, employees, agents, legal and financial advisors or other representatives);provided, however, except as otherwise provided herein, no such termination shall relieve any partyhereto of any liability or damages resulting from any willful breach of this Agreement.

ii. In the event that this Agreement is terminated pursuant to Section 8.4(d)(i) or (iii), and in either suchcase at the time of such termination any Person shall have made an Acquisition Proposal to theCompany or any of its stockholders or shall have publicly announced an intention (whether or notconditional) to make an Acquisition Proposal with respect to the Company, if within 12 months ofsuch termination, the Company enters into a definitive agreement concerning a transaction thatconstitutes an Acquisition Proposal, the Company shall (A) at the time of entering into suchagreement, pay to Parent a termination fee of equal to 3% of the Aggregate Merger Consideration(determined on the date of this Agreement), payable by wire transfer of same day funds and (B) in noevent later than two business days after Parent shall have requested payment of its charges andexpenses incurred in connection with the transactions contemplated hereby, pay to Parent the amountof such charges and expenses up to a maximum of $1,000,000, payable by wire transfer of same dayfunds.

iii. The Company and Parent each acknowledge that the agreements contained in Section 8.4(e)(ii) are anintegral part of the transactions contemplated by this Agreement, and that, without these agreements,the Company, Parent and Merger Sub would not enter into this Agreement.

SECTION 8.5 Definitions. As used in this Agreement the terms set forth below shall have the following meanings:

�Affiliate�

of a Person means any other Person who directly or indirectly through one or more intermediaries controls, iscontrolled by or is under common control with such Person. �Control� means the possession of the power, directly orindirectly, to direct or cause the direction of the management and policies of a Person whether through the ownershipof voting securities, by contract or otherwise.

�Assets�

means assets of every kind and everything that is or may be available for the payment of liabilities (whether inchoate,tangible or intangible), including, without limitation, real and personal property but excluding Intellectual PropertyRights.

�Business Day�

means a day other than Saturday or Sunday or a day on which banks are required or authorized to close in the State ofVirginia.



�Code�

means the Internal Revenue Code of 1986, as amended.

�Company Material Adverse Effect�

means any event, change or effect that has, or could reasonably be expected to have, a material adverse effect on thebusiness, financial condition, Assets, liabilities or results of operations of the Company; provided, however, that noneof the following shall be deemed in themselves, either alone or in combination, to constitute, and none of the followingshall be taken into account in determining whether there has been or will be, a Company Material Adverse Effect: (a)any adverse effect to the extent attributable to the announcement or pendency of the Merger (including anycancellations of or delays in customer orders, any reduction in sales, any disruption in supplier, distributor, partner orsimilar relationships or any loss of employees); or (b) any adverse effect attributable to conditions generally affectingthe industries in which the Company participates, the U.S. economy as a whole or foreign economies in any locationswhere the Company has material operations or sales or suppliers or customers.

�Encumbrances�

means Liens, security interests, deeds of trust, encroachments, reservations, orders of Governmental Entities, decrees,judgments, contract rights, claims or equity of any kind.

�Environmental Laws�

means all applicable federal, state, local or foreign laws, rules and regulations, orders, decrees, judgments, permits,filings and licenses relating (i) to protection and clean-up of the environment and activities or conditions relatedthereto, including those relating to the generation, handling, disposal, transportation or release of HazardousSubstances and (ii) the health or safety of employees in the workplace environment, all as amended from time to time,and shall also include any common law theory based on nuisance, trespass, negligence or other tortious conduct.

�ERISA�

means the Employee Retirement Income Security Act of 1974, as amended, and all Laws promulgated pursuantthereto or in connection therewith.

� Escrow Agreement� means the Escrow Agreement, in the form attached hereto as Exhibit B, with such changes inform and substance as shall be requested by the Escrow Agent and reasonably acceptable to Parent and the Company.

�Exchange Agent�

means a bank or trust company designated as the exchange agent by Parent (which designation shall be reasonablyacceptable to the Stockholders� Representatives).

�Governmental Entity�

means any United States or other national, state, municipal or local government, domestic or foreign, any subdivision,agency, entity, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory,taxing, importing or other governmental or quasi-governmental authority.

�Hazardous Substances�

means any and all hazardous and toxic substances, wastes or materials, any pollutants, contaminants, or dangerousmaterials (including, but not limited to, polychlorinated biphenyls, PCBs, friable asbestos, volatile and semi-volatile



organic compounds, oil, petroleum products and fractions, and any materials which include hazardous constituents orbecome hazardous, toxic, or dangerous when their composition or state is changed), or any other similar substances ormaterials which are included under or regulated by any Environmental Laws.

�Holders�

means, with respect to any Person entitled to receive any portion of the Aggregate Merger Consideration distributablein accordance with Article I hereof, such holders on and as of the Effective Time and their respective successors byoperation of law, heirs, executors, administrators and legal representatives.

�Investor Rights Agreements�

means, collectively, (i) the Amended and Restated Investor Rights Agreement dated as of December 26, 2000 amongthe Company and the stockholders of the Company named therein, (ii) the Amended and Restated Right of FirstRefusal and Co-Sale Agreement dated as of December 26, 2000 among the Company and the stockholders of theCompany named therein and (iii) the Amended and Restated Voting Agreement dated as of December 26, 2000 amongthe Company and the stockholders of the Company named therein.

�Knowledge of the Company�

or �Company�s Knowledge� means the actual knowledge of any of the directors, executive officers, the chieftechnology officer and the chief financial officer of the Company as of the date hereof.

�Laws�

means all foreign, federal, state and local statutes, laws, ordinances, regulations, rules, resolutions, orders,determinations, writs, injunctions, awards (including, without limitation, awards of any arbitrator), judgments anddecrees applicable to the specified persons or entities.

�Liens�

means any mortgage, pledge, lien, security interest, conditional or installment sale agreement, encumbrance, charge orother claims of third parties of any kind.

�Ordinary Course of Business�

means all actions taken by a Person if such action is consistent with the past practices of such Person and is taken inthe ordinary course of the normal day-to-day operations of such Person.

�Parent Material Adverse Effect�

means a material adverse effect on the business, financial condition, assets, liabilities or results of operations of Parentand its Subsidiaries, taken as a whole; provided, however, that none of the following shall be deemed in themselves,either alone or in combination, to constitute, and none of the following shall be taken into account in determiningwhether there has been or will be, a Parent Material Adverse Effect: (a) any adverse effect to the extent attributable tothe announcement or pendency of the Merger (including any cancellations of or delays in customer orders, anyreduction in sales, any disruption in supplier, distributor, partner or similar relationships or any loss of employees); or(b) any adverse effect attributable to conditions affecting the industries in which Parent participates, the U.S. economyas a whole or foreign economies in any locations where Parent has material operations or sales or suppliers orcustomers.

�Permitted Encumbrances�



means (i) Liens for Taxes not yet due or which are being contested in good faith by appropriate proceedings and forwhich adequate reserves have been established in accordance with applicable generally accepted accountingprinciples; (ii) such minor encumbrances, easements or reservations of, or rights of others for, sewers, electric lines,telegraph and telephone lines and other similar purposes, or zoning restrictions as to the use of real properties, whichdo not materially interfere with the use, occupation and enjoyment of the property subject to the Lien by and inconnection with the applicable business; (iii) Liens in immaterial amounts incurred in the Ordinary Course of Businessin connection with workers� compensation, unemployment insurance and other types of social security; and (iv) Liensin immaterial amounts in favor of customs authorities arising as a matter of law to secure payment of customs duties inconnection with the importation of goods to the extent accrued on the relevant Financial Statements.

�Person�

means any individual, corporation, partnership, limited partnership, limited liability company, trust, association orentity or government agency or authority.

�Stock Plan�

means the Amended and Restated 2000 Stock Incentive Plan of the Company, as approved and adopted by the Boardof Directors and stockholders of the Company on December 26, 2000.

�Subsidiary�

of a Person means any corporation, partnership, joint venture or other entity in which such person (a) owns, directly orindirectly, 50% or more of the outstanding voting securities or equity interests or (b) is a general partner.

�Tax�

(and, with correlative meaning, �Taxes� and �Taxable�) means any federal, state, local or foreign net income, grossincome, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise,employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, orenvironmental tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kindwhatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any governmentalauthority.

�Tax Return�

means any return, report or similar statement required to be filed with respect to any Tax (including any attachedschedules), including, without limitation, any information return, claim for refund, amended return or declaration ofestimated Tax.

SECTION 8.6 Notices. Any notice, request, demand, waiver, consent, approval, or other communication which isrequired or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if deliveredto the party personally or sent to the party by facsimile transmission (promptly followed by a hard-copy deliveredin accordance with this Section 8.8) or by registered or certified mail (return receipt requested), with postage andregistration or certification fees thereon prepaid, addressed to the party at its address set forth below:

If to Parent:

Tellabs, Inc.1415 West DiehlNaperville, Illinois 60563



Attention: General CounselFacsimile: 630-798-3231

with a copy to:

Sidley Austin Brown & WoodBank One Plaza10 South DearbornChicago, Illinois 60603Facsimile: 312-853-7036Attention: Imad I. Qasim

If to the Company:

Ocular Networks, Inc.Sunset Corporate Plaza II11109 Sunset Hills RoadReston, VA 20190Facsimile: 703-435-3394Attention: Edward H. Kennedy

with a copy to:

Covington & Burling1201 Pennsylvania Avenue, NWWashington, DC 20004Facsimile: 202-662-6291Attention: Paul V. Rogers

or to such other address or Person as any party may have specified in a notice duly given to the other party as providedherein. Such notice, request, demand, waiver, consent, approval or other communication will be deemed to have beengiven as of the date so delivered, telegraphed or mailed.

SECTION 8.7 Amendment. This Agreement may be amended, modified or supplemented at any time prior tothe Effective Time by mutual agreement of the respective Boards of Directors of the Company and Parent, except asprovided in Section 251(d) of the DGCL. Any amendment, modification or revision of this Agreement and any waiverof compliance or consent with respect hereto shall be effective only if in a written instrument executed by the partieshereto.

SECTION 8.8 Governing Law. This Agreement shall be governed by and interpreted and enforced in accordancewith the laws of the State of Delaware as applied to contracts made and fully performed in such state.

SECTION 8.9 No Benefit to Others. The representations, warranties, covenants and agreements contained in thisAgreement are for the sole benefit of the parties hereto, and their respective successors and assigns, and they shall notbe construed as conferring, and are not intended to confer, any rights on any other Person except as provided in Section5.13 and 7.3(b).

SECTION 8.10 Severability. If any term or other provision of this Agreement is determined to be invalid, illegalor incapable of being enforced by any rule of law or public policy, all other terms and provisions of the Agreement shallremain in full force and effect. Upon such determination, the parties hereto shall negotiate in good faith to modify thisAgreement so as to give effect to the original intent of the parties to the fullest extent permitted by applicable law.



SECTION 8.11 Section Headings. All section headings are for convenience only and shall in no way modify orrestrict any of the terms or provisions hereof.

SECTION 8.12 Schedules and Exhibits. All Schedules and Exhibits referred to herein are intended to be andhereby are specifically made a part of this Agreement.

SECTION 8.13 Extensions. At any time prior to the Effective Time, Parent, on the one hand, and the Companyon the other may by corporate action, extend the time for compliance by or waive performance of any representation,warranty, condition or obligation of the other party subject to the provisions of Section 8.7 regarding the manner ofwaiver.

SECTION 8.14 Counterparts. This Agreement may be executed in two or more counterparts, each of which shallbe deemed an original, and the Company and Parent may become a party hereto by executing a counterpart hereof. ThisAgreement and any counterpart so executed shall be deemed to be one and the same instrument.

SECTION 8.15 Enforcement. The parties agree that irreparable damage would occur in the event that any of theprovisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of thisAgreement and to enforce specifically the terms and provisions of this Agreement in any court in the United States orany state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.

SECTION 8.16 Fees and Expenses. Except as provided in this Section 8.16 and Section 8.4, whether or notthe Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactionscontemplated hereby including, without limitation, the fees and disbursements of counsel, financial advisors andaccountants, shall be paid by the party incurring such costs and expenses.

The parties hereto, intending to be legally bound hereby, have duly executed this Agreement and Plan of Merger as ofthe date first above written.

TELLABS, INC.

By:/s Richard C. Notebaert

ORBIT MERGER SUB, INC.

By:/s Richard C. Notebaert

OCULAR NETWORKS, INC.

By:/s Edward H. Kennedy

Edward H. KennedyChief Executive Officer



EXHIBIT C

[form of]

Escrow Agreement

Among

Tellabs, Inc.

Orbit Merger Sub, Inc.

Ocular Networks, Inc.

[Escrow Agent]

And

The Stockholders� Representatives

Dated as of November __, 2001

Escrow Agreement (this �Agreement�), dated as of November __, 2001, by and among Tellabs, Inc., a Delawarecorporation (�Parent�), Orbit Merger Sub., Inc., a Delaware corporation (�Merger Sub�), Ocular Networks, Inc., aDelaware corporation (the �Company�), [Name] (the �Escrow Agent�), and Edward H. Kennedy and Rob L. Soni,acting by virtue of the Agreement and Plan of Merger dated as of November 29, 2001 (the �Merger Agreement�) as theattorney-in-fact and Representative of the Stockholders of the Company (the �Stockholders� Representatives�).



Introduction

Parent, Merger Sub and the Company have entered into the Merger Agreement, providing for the merger of theMerger Sub with and into the Company, and in connection with which the Stockholders of the Company shall receivethe consideration described in the Merger Agreement.

Pursuant to the Merger Agreement, Parent, Merger Sub and the Company have agreed that the rights ofindemnification under Article VII of the Merger Agreement shall survive the consummation of the transactionscontemplated by the Merger Agreement and shall be secured, pursuant to this Agreement, by the Escrow Amount(together with any accumulations thereto as provided herein, the �Escrow Fund�), to be held by the Escrow Agent, asescrow agent hereunder, and deposited in escrow with the Escrow Agent. The Escrow Agent is willing to act in thecapacity of Escrow Agent hereunder subject to, and upon the terms and conditions of this Agreement.

Pursuant to the Merger Agreement, the Stockholders� Representative has been appointed as the Stockholders�attorney-in-fact and authorized and empowered to act, for and on behalf of any or all of the Stockholders (with fullpower of substitution in the premises) in connection with the indemnity provisions of the Merger Agreement, thisAgreement, and such other matters as are reasonably necessary for the consummation of the transactions contemplatedhereby and thereby.

Capitalized terms used and not defined herein have the meanings assigned to such terms in the Merger Agreement.

In consideration of the promises, covenants and agreements set forth in this Agreement and of other good andvaluable consideration, the receipt and legal sufficiency of which they hereby acknowledge, and intending to be legallybound hereby, and as an inducement for the execution and delivery of the Merger Agreement, Parent, Merger Sub, theCompany, the Escrow Agent and the Stockholders� Representative hereby agree as follows:

ARTICLE I

Designation of Escrow Agent and Capital Shares Subject to Escrow

SECTION 1.1 Designation of Escrow Agent. Parent, Merger Sub and the Company hereby mutually designate andappoint [Name], a corporation having an office and place of business located at [Address], as Escrow Agent for thepurposes set forth herein. The Escrow Agent hereby accepts such appointment and agrees to act in furtherance of theprovisions of the Merger Agreement, but only upon the terms and conditions provided in this Agreement.

SECTION 1.2 Capital Stock Subject to Escrow. In accordance with Section 7.2 of the Merger Agreement, uponexecution of this Agreement, Parent shall on the Closing Date deposit with the Escrow Agent as escrow agent hereunderthe Escrow Amount. The Escrow Agent shall hold and distribute the Escrow Fund in accordance with the terms hereof.

SECTION 1.3 Powers of Stockholders� Representatives. Pursuant to the Merger Agreement, Edward H. Kennedyand Rob L. Soni each has irrevocably been appointed as the Stockholders� Representatives to act as the true and lawfulagent of the Stockholders and attorney-in-fact with respect to all matters arising in connection with this Agreement,including but not limited to the power and authority on behalf of each Stockholder (other than in his or her own right)to do any one or all of the following:

a. give any written notices or consents and seek any declaratory judgments, damages or other appropriate relieffrom a court or other tribunal that the Stockholders� Representative may consider necessary or appropriate;

b. give any written direction to the Escrow Agent as the Stockholders� Representative may consider necessary orappropriate;



c. make, execute and deliver such amendments of and supplements to this Agreement or any other agreements,instruments or documents relating hereto that the Stockholders� Representative may consider necessary orappropriate and not materially adverse to the Stockholders� interests hereunder, such authority to beconclusively evidenced by the execution and delivery thereof; and

d. take all actions and do all things, including but not limited to the execution and delivery of all documentsnecessary or proper, required, contemplated or deemed advisable by the Stockholders� Representatives,including the execution, delivery and surrender of the Escrow Certificates and accompanying stock powers,and generally to act for and in the name of each such Stockholder with respect to this Agreement.

ARTICLE II

Treatment of Accumulations to Escrow Amount

SECTION 2.1 Escrow Period; Distribution Upon Termination of Escrow Periods. Subject to the followingrequirements, the Escrow Fund shall be in existence immediately following the Closing Date and shall terminate onthe first anniversary of the Closing Date (the �Escrow Period�); provided, however, that the Escrow Period shall notterminate with respect to any amount which, in the reasonable judgment of Parent, is necessary to satisfy any unsatisfiedclaims specified in any Officer�s Certificate (as defined below) delivered to the Escrow Agent prior to termination ofsuch Escrow Period with respect to facts and circumstances existing prior to the termination of such Escrow Period.The Escrow Agent shall promptly deliver to the Stockholders, and the Escrow Period shall terminate with respect to,the remaining portion of the Escrow Fund not required to satisfy such claims following the termination of the EscrowPeriod. As soon as all such claims have been resolved and obligations have been satisfied, the Escrow Agent shalldeliver to the Stockholders all portions of the Escrow Fund not required to satisfy such claims. Stockholders shallreceive a pro rata portion of the funds released from the Escrow Fund in proportion to their respective contributions tothe Escrow Fund.

SECTION 2.2 Protection and Investment of Escrow Fund.

a. The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, shall treat such fundas a trust fund in accordance with the terms of this Agreement and not as the property of Parent, and shall holdand dispose of the Escrow Fund only in accordance with the terms hereof.

b. From the date hereof until the date of disbursement of the Escrow Fund pursuant to this Agreement, theEscrow Agent is authorized and directed to invest and reinvest the cash portion, if any, of the Escrow Fund inany of the following investments (each a �Permitted Investment�) in each case pursuant to joint instructions ofthe Parent and the Stockholder Representatives: (i) readily marketable obligations maturing within six (6)months after the date of acquisition thereof issued by the United States of America or any agency orinstrumentality thereof; (ii) readily marketable obligations maturing within six (6) months after the date ofacquisition thereof issued by any state or municipality within the United States of America, or any politicalsubdivision, agency or instrumentality thereof, rated �A� or better by either Standard & Poor�s Corporation orMoody�s Investors Service Inc.; (iii) readily marketable commercial paper maturing within one hundredeighty (180) days after the date of issuance thereof which has the highest credit rating of either Standard &Poor�s Corporation or Moody�s Investors Service, Inc.; or (iv) 6 month certificates of deposit issued by anybank incorporated and doing business pursuant to the laws of the United States of America or any state thereofhaving combined capital and surplus of at least $500,000,000. In the event the Escrow Agent does not receivejoint instructions from Parent and the Stockholder Representatives to invest or reinvest the cash portion of theEscrow Fund, the Escrow Agent agrees to invest and reinvest such funds in [insert name of Escrow Agent�sMoney Market Fund], or a successor or similar fund agreed to by Parent and the Stockholder Representativesin writing, which invests in direct obligations of, or obligations fully guaranteed as to principal and interest bythe United States Government and repurchase agreements with respect to such securities. Permitted



Investments and interest accruing on, and any profit resulting from, such investments shall be added to, andbecome a part of, the Escrow Fund pursuant to this Escrow Agreement and shall be allocated among theStockholders pro rata, based on their respective contributions to the Escrow Fund. For purposes of this EscrowAgreement, �interest� on the Escrow Fund shall include all proceeds thereof and investment earnings withrespect thereto. All Permitted Investments shall be registered in the name of the Escrow Agent. The EscrowAgent shall have full power and authority to sell any and all Permitted Investments held by it under thisEscrow Agreement as necessary to make disbursements under this Escrow Agreement, and may use its [BondDepartment] to effect such sales. None of the Escrow Agent, Parent, the Surviving Corporation or theStockholder Representatives shall be responsible for any unrealized profit or realized loss realized on suchinvestments.

ARTICLE III

Distribution of Escrow Fund Upon Termination of this Agreement

SECTION 3.1 Third-Party Claims. In the event Parent notifies the Stockholders� Representatives of a claim orLegal Proceeding pursuant to Section 7.4 of the Merger Agreement, the Stockholders� Representatives shall be entitledto participate in any defense of such claim in accordance with Section 7.4 of the Merger Agreement. The IndemnifiedParty with respect to such claim or Legal Proceeding may not settle any such claim or Legal Proceeding without theconsent of the Stockholders� Representatives, which consent shall not be unreasonably withheld or delayed. In the eventthat the Stockholders� Representatives have consented to any such settlement or if they elected to participate in thedefense of any such claim or Legal Proceeding, the Stockholders shall have no power or authority to object under anyprovision of this Article III to the amount of any claim by an Indemnified Party against the Escrow Fund with respectto such settlement or Losses that may result from such claim or Legal Proceeding; provided that such claim by suchIndemnified Party is consistent with such settlement or the amount of Losses that have been incurred in connection withsuch claim or Legal Proceeding, as applicable.

SECTION 3.2 Claims Upon Escrow Fund. Upon receipt by the Escrow Agent at any time on or before the lastday of the Escrow Period of a certificate signed in good faith by any officer of Parent (an �Officer�s Certificate�): (a)stating that an Indemnified Party has paid, incurred or properly accrued or reasonably anticipates that it will have to pay,incur or accrue Losses, and (b) specifying in reasonable detail the individual items of Losses included in the amountso stated (to the extent known by such person), the date each such item was paid, incurred or properly accrued, or thebasis for such anticipated liability, and the nature of the misrepresentation, breach of warranty or covenant to whichsuch item is related, the Escrow Agent shall deliver to Parent out of the Escrow Fund, as promptly as practicable, butsubject to Section 3.3, an amount of funds held in the Escrow Fund in the manner set forth in the immediately followingsentence, with an aggregate value equal to such Losses; provided, however, that in the event of a third party claim thatis the subject of the demand on the Escrow Fund, no funds shall be delivered out of the Escrow Fund for payment ofsuch claim until the claim is settled or adjudicated. The Escrow Agent shall allocate any amount of Loss it is required toreimburse to Parent in accordance with this Agreement among the Stockholders based on the amount contributed to theEscrow Fund at the Closing Date by each such Stockholder; thereafter, the Escrow Agent shall pay to Parent the amountof the Loss. Any funds delivered to Parent out of the Escrow Fund shall reduce each such Stockholder�s interest in theEscrow Fund in proportion to such Stockholder�s respective original contributions to the Escrow Fund.

SECTION 3.3 Notification of Stockholders� Representatives. At the time of delivery of any Officer�s Certificateto the Escrow Agent, a duplicate copy of such certificate shall be delivered to the Stockholders� Representatives, andfor a period of thirty days after such delivery, the Escrow Agent shall make no delivery to Parent of any funds unless theEscrow Agent shall have received written authorization from the Stockholders� Representatives to make such delivery.After the expiration of such thirty day period, the Escrow Agent shall make delivery of funds from the Escrow Fund;provided, however, that no such payment or delivery may be made if the Stockholders� Representatives shall object ina written statement to the claim made in the Officer�s Certificate, and such statement shall have been delivered to theEscrow Agent prior to the expiration of such thirty-day period.



SECTION 3.4 Resolution of Conflicts; Arbitration.

a. In case the Stockholders� Representatives shall object in writing to any claim or claims made in any Officer�sCertificate, the Stockholders� Representatives and Parent shall attempt in good faith to agree upon the rightsof the respective parties with respect to such of such claims. If the Stockholders� Representatives and Parentshould so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties andshall be furnished to the Escrow Agent in accordance with the terms thereof.

b. If no such agreement can be reached after good faith negotiation, either Parent or the Stockholders�Representatives may demand arbitration of the matter unless the amount of the claim or Loss is at issue inpending litigation with a third party, in which event arbitration shall not be commenced until such amount isascertained or both parties agree to arbitration; and in either such event the matter shall be settled byarbitration conducted by one arbitrator mutually agreeable to Parent and the Stockholders� Representatives. Inthe event that within forty five days after submission of any dispute to arbitration, Parent and theStockholders� Representatives cannot mutually agree on one arbitrator, Parent, on the one hand, and theStockholders� Representatives, on the other hand, shall each select one arbitrator, and the two arbitrators soselected shall select a third arbitrator. The arbitrator or arbitrators, as the case may be, shall set a limited timeperiod and establish procedures designed to reduce the cost and time for discovery while allowing the partiesan opportunity, adequate in the sole judgment of the arbitrator or majority of the three arbitrators, as the casemay be, to discover relevant information from the opposing parties about the subject matter of the dispute.The arbitrator or a majority of the three arbitrators, as the case may be, shall rule upon motions to compel orlimit discovery and shall have the authority to impose sanctions, including attorneys� fees and costs, to thesame extent as a competent court of law or equity, should the arbitrators or a majority of the three arbitrators,as the case may be, determine that discovery was sought without substantial justification or that discovery wasrefused or objected to without substantial justification. The decision of the arbitrator or a majority of the threearbitrators, as the case may be, as to the validity and amount of any claim in such Officer�s Certificate shall bebinding and conclusive upon the parties to this Agreement. Such decision shall be written and shall besupported by written findings of fact and conclusions which shall set forth the award, judgment, decree ororder awarded by the arbitrator(s).

c. Judgment upon any award rendered by the arbitrator(s) may be entered in any court having jurisdiction. Anysuch arbitration shall be held in Wilmington, Delaware, under the rules then in effect of the AmericanArbitration Association. The arbitrator(s) shall determine how all expenses relating to the arbitration shall bepaid, including without limitation, the respective expenses of each party, the fees of each arbitrator and theadministrative fee of the American Arbitration Association.

ARTICLE IV

Escrow Agent

SECTION 4.1 Escrow Agent�s Duties.

a. The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forthherein, and as set forth in any additional written escrow instructions which the Escrow Agent may receiveafter the date of this Agreement which are signed by an officer of Parent and the Stockholders�Representatives, and may rely and shall be protected in relying or refraining from acting on any instrumentreasonably believed to be genuine and to have been signed or presented by the proper party or parties. TheEscrow Agent shall not be liable for any act done or omitted hereunder as Escrow Agent while acting in goodfaith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counselshall be conclusive evidence of such good faith.



b. The Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the partieshereto or by any other person, and is hereby expressly authorized to comply with and obey any final non-appealable orders, judgments or decrees of any court or of the arbitrator(s). In case the Escrow Agent obeys orcomplies with any such order, judgment or decree of any court or of the arbitration panel, the Escrow Agentshall not be liable to any of the parties hereto or to any other person by reason of such compliance,notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, setaside, vacated or found to have been entered without jurisdiction.

c. The Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of the partiesexecuting or delivering or purporting to execute or deliver this Agreement or any documents or papersdeposited or called for hereunder.

d. The Escrow Agent shall not be liable for the expiration of any rights under any statute of limitations withrespect to this Agreement or any documents deposited with the Escrow Agent.

e. In performing any duties under the Agreement, the Escrow Agent shall not be liable to any party for damages,losses, or expenses, except for negligence or willful misconduct on the part of the Escrow Agent. The EscrowAgent shall not incur any such liability for any action taken or omitted in reliance upon any instrument,including any written statement of affidavit provided for in this Agreement that the Escrow Agent shall ingood faith believe to be genuine, nor will the Escrow Agent be liable or responsible for forgeries, fraud,impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent mayconsult with legal counsel in connection with the Escrow Agent�s duties under this Agreement and shall befully protected in any act taken, suffered, or permitted by him, her or it in good faith in accordance with theadvice of counsel. The Escrow Agent is not responsible for determining and verifying the authority of anyperson acting or purporting to act on behalf of any party to this Agreement; provided such determination orverification is in good faith.

f. If any controversy arises between the parties to this Agreement, or with any other party, concerning thesubject matter of this Agreement, its terms or conditions, the Escrow Agent will not be required to resolve thecontroversy or to take any action regarding it. The Escrow Agent may hold all documents and the EscrowFund and may wait for settlement of any such controversy by final appropriate legal proceedings or othermeans as, in the Escrow Agent�s discretion, the Escrow Agent may reasonably require, despite what may beset forth elsewhere in this Agreement. In such event, the Escrow Agent will not be liable for any damages.Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answerand litigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerkof the court all documents and the Escrow Fund held in escrow, except all costs, expenses, charges andreasonable attorney�s fees incurred by the Escrow Agent due to the interpleader action and which the partiesjointly and severally agree to pay. Upon initiating such action, the Escrow Agent shall be fully released anddischarged of and from all obligations and liability by the terms of this Agreement.

g. The parties and their respective successors and assigns agree jointly and severally to indemnify and holdEscrow Agent harmless against any and all losses, claims, damages, liabilities, and expenses, includingreasonable costs of investigation, counsel fees, including allocated costs of in-house counsel anddisbursements that may be imposed on Escrow Agent or incurred by Escrow Agent in connection with theperformance of its duties under this Agreement, including but not limited to any litigation or arbitrationarising from this Agreement or involving its subject matter other than arising out of its negligence or willfulmisconduct.

h. The Escrow Agent may resign at any time upon giving at least thirty days written notice to the parties;provided, however, that no such resignation shall become effective until the appointment of a successorescrow agent which shall be accomplished as follows: the parties shall use their best efforts to mutually agree



on a successor escrow agent within thirty days after receiving such notice. If the parties fail to agree upon asuccessor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrowagent authorized to do business in the State of Delaware. The successor escrow agent shall execute and deliveran instrument accepting such appointment and it shall, without further acts, be vested with all the estates,properties, rights, powers, and duties of the predecessor escrow agent as if originally named as Escrow Agent.Upon appointment of a successor escrow agent, the Escrow Agent shall be discharged from any further dutiesand liability under this Agreement.

SECTION 4.2 Fees. All fees of the Escrow Agent for performance of its duties hereunder shall be paid by Parentin accordance with the standard fee schedule of the Escrow Agent. It is understood that the fees and usual chargesagreed upon for services of the Escrow Agent shall be considered compensation for ordinary services as contemplatedby this Agreement. In the event that the conditions of this Agreement are not promptly fulfilled, or if the EscrowAgent renders any service not provided for in this Agreement, or if the parties request a substantial modification ofits terms, or if any controversy arises, or if the Escrow Agent is made a party to, or intervenes in, any litigation orarbitration pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be reasonably compensated forsuch extraordinary services and reimbursed for all costs, attorney�s fees, including allocated costs of in-house counsel,and expenses occasioned by such default, delay, controversy or litigation or arbitration.

SECTION 4.3 Consequential Damages. In no event shall the Escrow Agent be liable for special, indirect orconsequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the EscrowAgent has been advised of the likelihood of such loss or damage and regardless of the form of action.

SECTION 4.4 Successor Escrow Agents. Any corporation into which the Escrow Agent in its individual capacitymay be merged or converted or with which it may be consolidated, or any corporation resulting from any merger,conversion or consolidation to which the Escrow Agent in its individual capacity shall be a party, or any corporation towhich substantially all the corporate trust business of the Escrow Agent in its individual capacity may be transferred,shall be the Escrow Agent under this Escrow Agreement without further act.

SECTION 4.5 Taxes. All dividends, distributions, interest and gains earned or realized on the Escrow Fund(�Earnings�) shall be treated as having been received, for tax purposes, by the Stockholders to whom the Earningsare credited. Annex A hereto sets forth a list of each Stockholder�s address and Taxpayer Identification Number.The Escrow Agent annually shall file information returns with the United States Internal Revenue Service and payeestatements with the Stockholders, documenting such Earnings. Upon request of the Escrow Agent, the Stockholdersshall provide to the Escrow Agent all forms and information necessary to complete such information returns and payeestatements. In the event the Escrow Agent becomes liable for the payment of taxes, including withholding taxes, relatingto Earnings or any payment made hereunder, the Escrow Agent may deduct such taxes from the Indemnity Fund.

ARTICLE V

The Stockholders� Representatives

SECTION 5.1 Stockholders� Representatives Powers and Authority. The Stockholders� Representatives shallhave full power and authority to represent all of the Stockholders and their successors with respect to all mattersarising under this Agreement and the Merger Agreement and all actions taken by the Stockholders� Representativeshereunder and thereunder shall be binding upon all such Stockholders and their successors as if expressly confirmedand ratified in writing by each of them. The Stockholders� Representatives shall take any and all actions whichthey believe are necessary or appropriate under this Agreement and the Merger Agreement for and on behalf of theStockholders, as fully as if the Stockholders were acting on their own behalf, including, without limitation, defendingall indemnity claims against the Stockholders pursuant to Section 7.2 of the Merger Agreement (an �Indemnity Claim�),consenting to, compromising or settling all Indemnity Claims, conducting negotiations with Parent and its agentsregarding such claims, dealing with Parent and the Escrow Agent under this Agreement and the Merger Agreement



with respect to all matters arising under this Agreement and the Merger Agreement, taking any and all other actionsspecified in or contemplated by this Agreement and the Merger Agreement, and engaging counsel, accountants orother Stockholders� Representatives in connection with the foregoing matters. Without limiting the generality ofthe foregoing, the Stockholders� Representatives shall have full power and authority to interpret all the terms andprovisions of this Agreement and the Merger Agreement and to consent to any amendment hereof or thereof on behalfof all such Stockholders and such successors. Any action taken by the Stockholders� Representatives hereunder mustbe taken jointly by both Stockholders� Representatives to be effective.

SECTION 5.2 Indemnification of Stockholders� Representative. The Stockholders� Representatives may act uponany instrument or other writing believed by the Stockholders� Representatives in good faith to be genuine and to besigned or presented by the proper person and shall not be liable in connection with the performance by him of his dutiespursuant to the provisions of this Agreement, except for his own willful default or gross negligence. The Stockholders�Representatives shall be, and hereby are, indemnified and held harmless, jointly and severally, by the Stockholders fromall losses, costs and expenses (including attorneys� fees) that may be incurred by the Stockholders� Representativesas a result of the Stockholders� Representatives� performance of their duties under this Agreement and the MergerAgreement; provided that a Stockholders� Representative shall not be entitled to indemnification for losses, costs orexpenses that result from any action taken or omitted by such Stockholders� Representative as a result of his willfuldefault or gross negligence; and provided, further, that each Stockholder�s obligation to indemnify the Stockholders�Representatives under this Agreement and the Merger Agreement shall be limited to, and payable only from, eachStockholder�s pro rata interest in the Escrow Fund and cash available, if any, to the Stockholders under the EscrowAgreement. The Escrow Agent shall from time to time pay such Stockholders� Representatives� costs and expenses, tothe extent required by the preceding sentence.

SECTION 5.3 Access to Information. The Stockholders� Representatives shall have reasonable access toinformation of and concerning any Indemnity Claim and which is in the possession, custody or control of theCompany and the reasonable assistance of the Company�s officers and employees for purposes of performing theStockholders� Representatives� duties under this Agreement or the Merger Agreement and exercising its rights underthis Agreement and the Merger Agreement, including for the purpose of evaluating any Indemnity Claim againstthe Escrow Shares by Parent; provided that the Stockholders� Representatives shall treat confidentially and notdisclose any nonpublic information from or concerning any Indemnity Claim to anyone (except to the Stockholders�Representatives� attorneys, accountants and other advisers, to Stockholders, to the arbitrators appointed to resolvedisputes pursuant to this Agreement, and on a need-to-know basis to other individuals who agree to keep suchinformation confidential pursuant to confidentiality agreements reasonably acceptable to Parent).

SECTION 5.4 Reasonable Reliance. In the performance of their duties hereunder, the Stockholders�Representatives shall be entitled to rely upon any document or instrument reasonably believed by him to be genuine,accurate as to content and signed by any Stockholder or Parent. The Stockholders� Representatives may assume thatany person purporting to give any notice in accordance with the provisions hereof has been duly authorized to do so.

SECTION 5.5 Attorney-in-Fact.

a. The Stockholders� Representatives are hereby appointed and constituted the true and lawful attorney-in-factof each Stockholder, with full power in his, her or its name and on his, her or its behalf to act according to theterms of this Agreement and the Merger Agreement in the absolute discretion of the Stockholders�Representatives, and in general to do all things and to perform all acts including, without limitation, executingand delivering this Agreement and any other agreements, certificates, receipts, instructions, notices orinstruments contemplated by or deemed advisable in connection with this Agreement.

b. This power of attorney and all authority hereby conferred is granted and shall be irrevocable and shall not beterminated by any act of any Stockholder, by operation of law, whether by such Stockholder�s death,disability protective supervision or any other event. Without limitation to the foregoing, this power of attorney



is to ensure the performance of a special obligation and, accordingly, each Stockholder hereby renounces its,his or her right to renounce this power of attorney unilaterally any time before the end of the Escrow Period.

c. Each Stockholder hereby waives any and all defenses which may be available to contest, negate or disaffirmthe action of the Stockholders� Representatives taken in good faith under this Agreement.

d. Notwithstanding the power of attorney granted in this Article V, no agreement, instrument, acknowledgementor other act or document shall be ineffective by reason only of the Stockholders having signed or given suchdirectly instead of the Stockholders� Representatives.

SECTION 5.6 Liability. If the Stockholders� Representatives are required by the terms of this Agreement todetermine the occurrence of any event or contingency, the Stockholders� Representatives shall, in making suchdetermination, be liable to the Stockholders only for their proven bad faith as determined in light of all thecircumstances, including the time and facilities available to him in the ordinary conduct of business. In determiningthe occurrence of any such event or contingency, the Stockholders� Representatives may request from any of theStockholders or any other person such reasonable additional evidence as the Stockholders� Representatives in their solediscretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and mayat any time inquire of and consult with others, including any of the Stockholders, and the Stockholders� Representativesshall not be liable to any Stockholder for any damages resulting from his delay in acting hereunder pending his receiptand examination of additional evidence requested by him.

SECTION 5.7 Orders. The Stockholders� Representatives are authorized, in their sole discretion, to comply withfinal, nonappealable orders or decisions issued or process entered by any court of competent jurisdiction or arbitratorwith respect to the Escrow Funds. If any portion of the Escrow Fund is disbursed to the Stockholders� Representativesand is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer,conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any order, judgmentor decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event,the Stockholders� Representatives are authorized, in their sole discretion, but in good faith, to rely upon and complywith any such order, writ, judgment or decree which he is advised by legal counsel selected by him is binding upon himwithout the need for appeal or other action; and if the Stockholders� Representatives comply with any such order, writ,judgment or decree, they shall not be liable to any Stockholder or to any other Person by reason of such compliance eventhough such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated.

SECTION 5.8 Removal of Stockholders� Representatives; Authority of Successor Stockholders� Representatives.Stockholders who in the aggregate hold at least a majority of the Stockholders� interest in the Escrow Fund shall havethe right at any time during the term of the Escrow Agreement to remove the then-acting Stockholders� Representativesand to appoint a successor Stockholders� Representatives; provided, however, that neither such removal of thethen acting Stockholders� Representatives nor such appointment of successor Stockholders� Representatives shallbe effective until the delivery to the Escrow Agent of executed counterparts of a writing signed by each suchStockholder with respect to such removal and appointment, together with an acknowledgment signed by the successorStockholders� Representatives appointed in such writing they accept the responsibility of successor Stockholders�Representatives and agree to perform and be bound by all of the provisions of this Agreement applicable to theStockholders� Representatives. Each successor Stockholders Representative shall have all of the power, authority,rights and privileges conferred by this Agreement upon the original Stockholders� Representatives, and the term�Stockholders� Representatives� as used herein and in the Escrow Agreement shall be deemed to include any interimor successor Stockholders� Representatives.

ARTICLE VI

Miscellaneous



SECTION 6.1 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of theStockholders (by and through the Stockholders� Representatives), Parent and the Escrow Agent, and their respectivesuccessors and assigns, whether so expressed or not.

SECTION 6.2 Waiver of Consent. No failure or delay on the part of any party hereto in exercising any power orright hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, orany abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercisethereof or the exercise of any other right or power. The rights and remedies of the parties hereunder are cumulative andnot exclusive of any rights or remedies which they would otherwise have. No modification or waiver of any provisionof this Agreement, nor consent to any departure by any party therefrom, shall in any event be effective unless the sameshall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purposefor which given. No notice to or demand on any party in any case shall entitle such party to any other or further noticeor demand in similar or other circumstances.

SECTION 6.3 Captions. The Article and Section captions used herein are for reference purposes only and shall notin any way affect the meaning or interpretation of this Agreement.

SECTION 6.4 Notices. Any notice or other communication required or permitted hereunder shall be sufficientlygiven if delivered in person or sent by facsimile or by registered or certified mail or by recognized overnight courier,postage prepaid, addressed as follows:

a. If to Parent or Merger Sub, to:

Tellabs, Inc.1415 West Diehl RoadNaperville, Illinois 60563Attention: General CounselFacsimilie: 630-798-3231

with a copy (which shall not constitute notice) to its counsel:

Sidley Austin Brown & WoodBank One Plaza10 South DearbornChicago, Illinois 60603Attention: Imad I. QasimFacsimile: (312) 853-7036

b. if to the Company, to:

Ocular Networks, Inc.Sunset Corporate Plaza II11109 Sunset Hills RoadReston, VA 20190Attention: Edward H. KennedyFacsimile: (703) 435-3394

with a copy (which shall not constitute notice) to its counsel:

Covington & Burling1201 Pennsylvania Avenue, N.W.Washington, DC 20004



Attention: Paul V. RogersFacsimile: (202) 662-6291

c. if to the Escrow Agent, to:

d. if to the Stockholders� Representatives, to:

Such notice or communication shall be deemed to have been given as of the date so delivered, sent by facsimile ormailed.

SECTION 6.5 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall beconsidered one and the same agreement and each of which shall be deemed an original.

SECTION 6.6 Governing Law. The interpretation and construction of this Agreement, and all matters relatingthereto, shall be governed by the laws of the State of Delaware, without regard to the choice of law provisions thereof.Except as set forth in Section 3.4(c) with respect to any arbitration commenced pursuant to Section 3.4, the non-prevailing party in any dispute arising hereunder shall bear and pay the costs and expenses (including without limitationreasonable attorneys� fees and expenses) incurred by the prevailing party or parties in connection with resolving suchdispute.

SECTION 6.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a courtof competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, theremainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effectand shall in no way be affected, impaired or invalidated.

SECTION 6.8 Amendments and Waivers. The provisions of this Agreement, including the provisions of thissentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisionshereof may not be given without the written consent of Parent, the Stockholders� Representative and the EscrowAgent, and any amendment or waiver hereunder shall be effective and binding upon all Stockholders if signed by theStockholders� Representative.

[Signature Page Follows]

In Witness Whereof, each of the parties hereto, intending to be legally bound hereby, has duly executed this EscrowAgreement as of the date first above written.

TELLABS, INC.

By:______________________________Name:Title:

ORBIT MERGER SUB, INC.



By:______________________________Name:Title:

OCULAR NETWORKS, INC.

By:______________________________Edward H. KennedyPresident

[ESCROW AGENT]

By:______________________________Name:Title:

______________________________Edward H Kennedy,

as Stockholders� Representative

_______________________________Rob L. Soni,

as Stockholders� Representative



TELLABS

ADVANTAGE PROGRAM

Amended and Restated Effective January 1, 1997Except as Specifically Provided Otherwise

TABLE OF CONTENTS

Page

ARTICLE 1 GENERAL 11.1 Purpose 11.2 Source of Funds 11.3 Scope of Plan Coverage 11.4 Definititions 1

Account 1Accounts 1Active Participant 1Actual Deferral Percentage 2Administrative Committee 2Affiliate 2After-Tax Contribution 2Aggregate Limit 2Alternative Payee 2



Annual Addition 2Annuity Starting Date 2Basic before-Tax Contribution 2Board of Directors 2Business Day 3Code 3Coherent Accounts 3Coherent Acquisition Date 3Coherent Participant 3Coherent Plan 3Committees 3Company 3Compensation 4Contribution Percentage 4Defined Contribition Dollar Limitation 4Dependent 4Designated Before-Tax Contribution 4Determination Period 4Disability Plan 4Election Period 4Eligible Employee 4Eligible Individual 5Eligible Limited Participant 5Eligible Participant 5Eligible Retiree 5Eligible Retirement Plan 5Eligible Rollover Distribution 5Eligibility Period 5Employer 6Entry Date 6ERISA 6Employer Excess Contribution 6Excess Forfeiture Suspense Account 6Excess Tentative Employer Contribution 6Five-Percent Owner 6Funds 6Health Plan 6Highly Compensated Employee 6Hours of Service 7Individual Beneficiary 7Intern Employee 8Investment Committee 8Investment Manager 8Key Employee 8Leased Employee 8Limited Term Employee 8



Limitation Year 8Matching Contribution 8Maximum Annual Addition 8Medical Benefits 8Medical Benefits Account 8Member of a Collective Bargaining Unit 9Multiple Use 9Non-Highly Compensated Employee 9Normal Retirement Date 9One-Percent Owner 9Participant 9Plan 9Permissive Aggregation Group 9Plan Year 9Pre-Retirement Survivor Annuity 9Present Value 9Prior Plan 10Profit Sharing Contribution 10Provisional Annual Addition 10Qualified Domestic Relations Order 10Qualified Joint and Survivor Annuity 10Qualified Military Service 10Required Aggregation Group 10Required Beginning Date 10Retirement Contribution 11Retirement Program 11Rollover Contribution 11Salix Accounts 11Salix Acquisition Date 11Salix Participant 11Salix Plan 11Savings Program 12Service 12Simplified Employee Pension Plan 13Supplemental Before-Tax Contribution 13Tellabs Stock Fund 13Tentative Employer Contribution 13Top-Heavy 13Top-Heavy Determination Date 13Top-Heavy Ratio 14Trust 14Trustee 14Unit 14Valuation Date 14

1.5 EGTRRA Compliance 14



ARTICLE 2 ELIGIBILITY AND PARTICIPATION 152.1 Eligibility Requirements 152.2 Continued Participaton; Reemployment 162.3 Transfers and Changes in Status 162.4 Leaves of Absence 172.5 Qualifed Military Service 17

ARTICLE 3 CONTRIBUTIONS 183.1 Employer Contributions 183.2 Retirement Contribution Under the Retirement Program 183.3 Profit Sharing Contribution Under the Savings Program 183.4 Before-Tax Contributions Under the Savings Program 193.5 Limitations On Before-Tax Contributions Under the Savings Program 193.6 Matching Contribution Under the Savings Program 223.7 Limitations on Matching Contributions Under the Savings Program 233.8 Multiple Use 25

ARTICLE 4 CONTRIBUTIONS BY EMPLOYEE 274.1 No After-Tax Contributions 274.2 Rollover Contribution 27

ARTICLE 5 ACCOUNTING PROVISIONS AND ALLOCATIONS 285.1 Participant�s Accounts 285.2 Common Fund 285.3 Unit Values 315.4 Eligibility to Share in Employer Contributions and Forfeitures 315.5 Allocation of Before-Tax Contributions 325.6 Allocation of Matching Contributions 325.7 Allocation of After-Tax Contributions 325.8 Allocation of Retirement Contribution and Forfeitures 325.9 Allocation of Profit Sharing Contribution and Forfeitures 325.10 Crediting Accounts 325.11 Provisional Annual Addition 335.12 Limitation on Annual Additions 33

ARTICLE 6 AMOUNT OF PAYMENTS TO PARTICIPANTS 366.1 General Rule 366.2 Normal Retirement 366.3 Death 366.4 Disability 366.5 Vesting 366.6 Resignation or Dismissal 366.7 Treatment of Forfeitures 37

ARTICLE 7 DISTRIBUTIONS 387.1 Commencement and Form of Distributions 38



7.2 Qualified Joint and Survivor Annuity - Retirement Account, Salix Accounts and CoherentAccounts 41

7.3 Pre-Retirement Survivor Annuity - Retirement Account, Salix Accounts and CoherentAccounts 43

7.4 Distributions to Beneficiaries 447.5 Beneficiary Designations 457.6 Installment or Deferred Distributions 467.7 Form of Elections and Applications for Benefits 467.8 Unclaimed Distributions 467.9 Distributions in Kind 47

7.10 Distributions of Participant's After-Tax Account, Rollover Account, Salix Rollover Accountand Coherent Rollover Accounts Prior to Termination of Employment 47

7.11 Loans 487.12 Withdrawals Prior to Termination of Employment and After Age 59-1/2 507.13 Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals 517.14 Eligible Rollover Distributions 537.15 Facility of Payment 547.16 Claims Procedure 55

ARTICLE 8 TOP-HEAVY PLAN REQUIREMENTS 578.1 Top-Heavy Definitions 578.2 Top-Heavy Plan Requirements 60

ARTICLE 9 POWERS AND DUTIES OF COMMITTEES 629.1 Appointment of Committees 629.2 Powers and Duties of Administrative Committee 629.3 Powers and Duties of the Investment Committee 639.4 Committee Procedures 649.5 Consultation with Advisors 659.6 Committee Members as Participants 659.7 Records and Reports 659.8 Investment Policy 659.9 Designation of Other Fiduciaries 669.10 Obligations of Each Committee 669.11 Indemnification of Each Committee 67

ARTICLE 10 TRUSTEE AND TRUST FUND 6810.1 Trust Fund 6810.2 Payments to Trust Fund and Expenses 6810.3 Trustee�s Responsibilities 6810.4 Reversion to the Employer 68

ARTICLE 11 AMENDMENT OR TERMINATION 6911.1 Amendment 6911.2 Termination 6911.3 Form of Amendment, Discontinuance of Employer Contributions, and Termination 69



11.4 Limitations on Amendments 6911.5 Level of Benefits Upon Merger 70

11.6 Vesting Upon Termination or Discontinuance of Employer Contributions; Liquidation ofTrust 70

ARTICLE 12 MISCELLANEOUS 7212.1 No Guarantee of Employment, Etc. 7212.2 Nonalienation 7212.3 Qualified Domestic Relations Order 7212.4 Controlling Law 7212.5 Severability 7312.6 Notification of Addresses 7312.7 Gender and Number 73

ARTICLE 13 ADOPTION BY AFFILIATES 7413.1 Adoption of Plan 7413.2 The Company as Agent for Employer 7413.3 Termination of Amendments 7413.4 Termination 7413.5 Date to Be Furnished by Employers 7413.6 Joint Employers 7413.7 Expenses 7513.8 Withdrawal 7513.9 Prior Plans 75

ARTICLE 14 RETIREE MEDICAL BENEFITS 7614.1 Medical Benefits Account 7614.2 Retiree Medical Benefits Definitions 7614.3 Separate Account 7614.4 Impossibility of Diversion Prior to Satisfaction of All Liabilities 7714.5 Reversion upon Satisfaction of All Liabilities 7714.6 Medical Benefits 7714.7 Coordination with Health Plan 7714.8 Employer Contributions 7714.9 Reservation of Right to Terminate Medical Benefits 77

ARTICLE 1

General

SECTION 1.1 Purpose. It is the intention of the Employer to continue to provide for the administration ofthe Tellabs Retirement Plan, a money purchase pension plan, together with a retiree medical benefits account underthe provisions of Code Section 401(h) and the Tellabs Profit Sharing and Savings Plan, a profit sharing and CodeSection 401(k) savings program as parts of this Tellabs Advantage Program (the �Plan�) and a Trust Fund in



conjunction therewith for the benefit of eligible employees of an Employer, in accordance with the provisions of CodeSections 401 and 501 and in accordance with other provisions of law relating to money purchase pension plans andprofit sharing plans containing a Code Section 401(k) arrangement. Except as otherwise provided in this Plan or theTrust, upon the transfer by an Employer of any funds to the Trust Fund in accordance with the provisions of this Plan,all interest of the Employer therein shall cease and terminate, and no part of the Trust Fund shall be used for, or divertedto, purposes other than the exclusive benefit of Participants and their beneficiaries.

SECTION 1.2 Source of Funds. The Trust Fund shall be created, funded and maintained by contributions of anEmployer, by contributions of the Participants, and by such net earnings as are obtained from the investment of thefunds of the Trust Fund.

SECTION 1.3 Scope of Plan Coverage. The provisions of the Plan as herein restated shall be effective as ofJanuary 1, 1997, except for certain provisions the effective dates of which are set forth therein. However, the rightsand benefits of any Participant whose employment with an Employer prior to the Effective Date shall be determinedin accordance with the corresponding provisions of the Prior Plan documents as in effect upon the Participant�stermination of employment and, to the extent necessary, the provisions of the Prior Plan documents are herebyspecifically incorporated by reference into this Plan. Except as may be required by ERISA or the Code, the rights ofany person whose status as an employee of the Employer and all Affiliates has terminated shall be determined pursuantto the Plan as in effect on the date such employment terminated, unless a subsequently adopted provision of the Plan ismade specifically applicable to such person.

SECTION 1.4 Definitions. Certain terms are capitalized and have the respective meanings set forth in the Plan.

�Account� means each of the individual accounts established pursuant to Article 5 (Accounting Provisions andAllocations) representing a Participant�s allocable share of the Trust Fund.

�Accounts� means the collective individual accounts established pursuant to Article 5 (Accounting Provisions andAllocations).

�Active Participant� means a Participant who, on a given date, is employed by an Employer as an Eligible Employee.

�Actual Deferral Percentage� and �Actual Deferral Percentage Tests� are described in Section 3.5 (Limitations onBefore Tax Contributions Under the Savings Program).

�Administrative Committee� is the Committee so appointed in accordance with Article 9 (Powers and Duties ofCommittees) as the administrator and named fiduciary of the Plan.

�Affiliate� means any corporation or enterprise, other than the Company, which, as of a given date, is a memberof the same controlled group of corporations, the same group of trades or businesses under common control or thesame affiliated service group, determined in accordance with Code Sections 414(b), (c), (m) or (o), as is the Company.For purposes of determining the amount of a Participant�s Annual Addition or Total Compensation and applying thelimitations of Code Section 415 set forth in Article 5 (Accounting Provisions and Allocations), �Affiliate� shall includeany corporation or enterprise, other than the Company, which, as of a given date, is a member of the same controlledgroup of corporations or the same group of trades or businesses under common control, determined in accordance withCode Sections 414(b) or (c) as modified by Code Section 415(h), as is the Company.

�After-Tax Contribution� means after-tax employee contributions made by Participants under the Plan prior toJanuary 1, 1994.

�Aggregate Limit� is described in Section 3.8 (Multiple Use).



�Alternate Payee� means the person, other than the Participant, designated by a court to receive benefits under the Planin a Qualified Domestic Relations Order as further described in Section 12.3 (Qualified Domestic Relations Order).

�Annual Addition� means for any Limitation Year, the sum of (a) all Before-Tax Contributions, MatchingContributions, Profit Sharing Contributions (including forfeitures allocated as a part thereof), Retirement Contributions(including forfeitures allocated as a part thereof) and, for Limitation Years beginning prior to January 1, 1994, After-Tax Contributions, allocated to the Accounts of a Participant under this Plan; (b) any employer contributions, forfeituresand employee after-tax contributions allocated to such Participant under this or any other defined contribution planmaintained by the Employer or an Affiliate; and (c) amounts allocated to an individual medical account as defined inCode Section 415(l)(2) and amounts attributable to post-retirement medical benefits allocated to the separate account ofa �key employee,� as described in Code Section 419A(d)(3) maintained by the Employer or an Affiliate.

�Annuity Starting Date� means the first day of the first period for which a benefit is payable in the form of an annuityor any other form.

�Basic Before-Tax Contribution� means, for any period, with respect to a Participant, the portion of the Before-TaxContribution made on his behalf by an Employer during such period equal to the lesser of 3% of the Participant�sConsidered Compensation paid during such period or the Participant�s Before-Tax Contribution for such period. Forany period, �Basic Before-Tax Contribution� means, with respect to the Employer, the sum of such contributions.

�Before-Tax Contribution� means, with respect to a Participant, the contribution by an Employer on his behalfdescribed in Section 3.4 (Before-Tax Contribution Under the Savings Program) and, with respect to the Employer,means the sum of such contributions.

�Board of Directors� means the Board of Directors of the Company.

�Business Day� means each day on which the Federal Reserve, the New York Stock Exchange and the Trustee areopen for business, or if different and to the extent applicable, each day as of which trades are recognized under the rulesgoverning an investment fund of the Plan.

�Code� means the Internal Revenue Code of 1986 and the regulations promulgated thereunder, as from time to timeamended.

�Coherent Accounts� means the separate Coherent Before-Tax Account, Coherent Employer Account and CoherentRollover Account of Coherent Participants described in Section 5.1 (Participant Accounts).

�Coherent Acquisition Date� means the date of the acquisition of Coherent Communications Systems Corporation byTellabs, Inc.

�Coherent Participant� means employees of Coherent Communications Systems Corporation or any subsidiary thereofwho were participants in the Coherent Plan on December 31, 1998 and (a) became Participants in the Plan on January 1,1999, or (b) whose Coherent Accounts were subsequently transferred from the Coherent Plan to the Trust Fund as aresult of the merger of the Coherent Plan into the Plan effective April 1, 1999.

�Coherent Plan� means the Coherent Communications Systems Corporation Savings Incentive Plan as in effect on theCoherent Acquisition Date, and as amended from time to time thereafter up to and including its merger into the Planeffective April 1, 1999.

�Committees� means the Administrative Committee and the Investment Committee appointed pursuant to Article 9(Powers and Duties of the Committees).



�Company� means Tellabs Operations, Inc., a Delaware corporation, a predecessor of such corporation, or anysuccessor to it in ownership of all or substantially all of its assets.

�Compensation� means a Participant�s �Considered Compensation� or �Total Compensation,� as follows:

a. �Considered Compensation� is the Participant�s Total Compensation for the Plan Year paid while he was anActive Participant but excluding reimbursements or other expense allowances, fringe benefits (cash andnoncash), moving or education expenses, income from participation in any stock purchase plan, income fromstock awards, income from the exercise of stock appreciation rights, dividends on restricted stock or otherextraordinary remuneration, provided, however, beginning with the 1998 Plan Year Considered Compensationshall include amounts excluded from the Participant�s income for the period under Code Sections 125,132(f)(4), 402(g)(3) or 457 including before-tax contributions and elective contributions to a plan of theEmployer established under Code Section 125.

b. �Total Compensation� for a period is the Participant�s compensation (as described in Treasury RegulationSection 1.415-2(d)(2)) paid during the period for personal services actually rendered in the course ofemployment with the Employer and all Affiliates, excluding contributions made by an Employer (other thanthe Before-Tax Contribution) to a plan to the extent that such are not included in the gross income of theParticipant in the year made and other amounts which receive special tax treatment (as described in TreasuryRegulation Section 1.415-2(d)(3)); effective with the 1998 Plan Year, plus amounts excluded from theParticipant�s income for the period under Code Sections 125, 132(f)(4), 402(g)(3) or 457; provided, however,that the Total Compensation for any Participant taken into account for determining all benefits provided underthe Plan for any Plan Year shall not include any amount in excess of $160,000 (for any Plan Year beginningafter December 31, 2001, shall not include any amount in excess of $200,000) as adjusted by theCommissioner of the Internal Revenue Service for increases in the cost of living in accordance with CodeSection 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, notexceeding 12 months, over which compensation is determined (determination period) beginning in suchcalendar year. If a determination period consists of fewer than 12 months, the annual compensation limit willbe multiplied by a fraction, the numerator of which is the number of months in the determination period, andthe denominator of which is 12.

�Contribution Percentage� and �Contribution Percentage Tests� are described in Section 3.7 (Limitations on MatchingContributions Under the Savings Program).

�Defined Contribution Dollar Limitation� effective for Limitation Years beginning after December 31, 1994, meansan amount equal to $30,000 ($40,000 beginning with the 2002 Limitation Year), as adjusted by the Secretary of theTreasury pursuant to Code Section 415(d), prorated for any Limitation Year of less than 12 months; provided that forpurposes of Code Section 511(a)(ii), such amount shall be reduced by the amounts allocated to any medical accountsdescribed in subsection (c) of the definition of �Annual Addition.�

�Dependent� means an individual entitled to medical benefits as a dependent of an Eligible Retiree, as described inSection 14.2 (Retiree Medical Benefits Definitions).

�Designated Before-Tax Contributions� means the contributions referred to in Section 3.7 (Limitations on MatchingContributions Under the Savings Program).

�Determination Period� means the Plan Year containing the Top-Heavy Determination Date and the 4 preceding PlanYears, as further referenced in Article 8 (Top-Heavy Plan Requirements).

�Disability Plan� with respect to any Participant means the long term disability plan maintained by the Employer andcovering such Participant.



�Election Period�means the period defined in Section 7.2 (Qualified Joint and Survivor Annuity � Retirement Account,Salix Accounts and Coherent Accounts) relating to the period during which a Participant may elect to have theParticipant�s Retirement Account distributed in a form other than a Qualified Joint and Survivor Annuity.

�Eligible Employee� means any employee of the Employer but excluding any employee who is (1) a Member of aCollective Bargaining Unit; (2) an individual providing services to the Employer in the capacity of, or who is or wasdesignated by the Employer as, a Leased Employee, an independent contractor, Intern Employee or a Limited TermEmployee; or (3) are non-resident aliens who receive no earned income from the Employer which constitutes incomefrom services within the United States. Notwithstanding the foregoing, any employee of Salix Technologies, Inc. or anysubsidiary thereof who was eligible to participate in the Salix Plan as of May 19, 2000 will be considered an EligibleEmployee as of May 19, 2000. Notwithstanding the foregoing, any individual employed by Coherent CommunicationsSystems Corporation or any subsidiary thereof as of the Coherent Acquisition Date, or thereafter until December 31,1998, shall not become an Eligible Employee until January 1, 1999.

�Eligible Individual� means an individual entitled to Medical Benefits, as described in Section 14.2 (Retiree MedicalBenefits Definitions).

�Eligible Limited Participant� means an individual eligible to make Before-Tax Contributions under the SavingsProgram, but not entitled to receive the matching contribution portions of the Profit Sharing Contribution and theRetirement Contribution provisions of the Plan, as further described in subsection 2.1(d).

�Eligible Participant� means an Active Participant who has completed his Eligibility Period making him eligibleto share in the Matching Contribution bi-weekly, and share in the Profit Sharing Contribution and forfeitures andRetirement Contribution and forfeitures for a given quarter of the Plan Year as of the last day of the quarter for whichsuch contribution or forfeitures are being allocated if he is then employed by the Employer as an Eligible Employee andas further defined in Section 5.4 (Eligibility to Share in Employer Contributions and Forfeitures).

�Eligible Retiree� means an individual entitled to receive retiree medical benefits under the Health Plan, as describedin Section 14.2 (Retiree Medical Benefits Definitions).

�Eligible Retirement Plan� with respect to a Participant, the surviving spouse of a Participant or a former spouse ofthe Participant who is an Alternate Payee under a Qualified Domestic Relations Order is (a) an individual retirementaccount described in Code Section 408(a) or individual retirement annuity described in Code Section 408(b), and, withrespect to a Participant, is also (b) an annuity plan described in Code Section 403(a) or a qualified trust described inCode Section 401(a).

�Eligible Rollover Distribution� means any rollover distribution of the Accounts distributable to a Participant, thesurviving spouse of a Participant or the former spouse of the Participant who is an Alternate Payee under a QualifiedDomestic Relations Order; provided, however, (a) the portion of any distribution required to be made under CodeSection 401(a)(9), (b) the portion of any distribution that is not includable in the gross income of the recipient(determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities),shall not constitute an Eligible Rollover Distribution and (c) the portion of the Account distributed to a Participantas a hardship withdrawal pursuant to subsection 7.13(b) (Pre-59-1/2 Coherent Account Withdrawals; HardshipWithdrawals) shall not constitute an Eligible Rollover Distribution.

�Eligibility Period� is a rolling one-year period used for the purpose of determining when an employee is eligible toshare in the Matching Contribution, the Profit Sharing Contribution and forfeitures and the Retirement Contributionand forfeitures. An employee�s first Eligibility Period shall commence on the date on which he first completes anHour of Service. Subsequent Eligibility Periods shall commence on the first day of each month following such date.Notwithstanding the foregoing, the initial Eligibility Period of a former employee who is reemployed after incurring aPeriod of Severance of one year or more and who is not eligible for immediate participation pursuant to Section 2.1(c)(Eligibility Requirements) shall commence on the date on which he first performs duties for an Employer or an Affiliate



after such Period of Severance and subsequent Eligibility Periods shall commence on the Entry Date following suchdate.

�Employer� means the Company and any Affiliate which adopts this Plan pursuant to Article 13 (Adoption byAffiliates).

�Entry Date� means the first day of each Plan Year, the first day of the fourth month of each Plan Year, the first dayof the seventh month of each Plan Year and the first day of the tenth month of the Plan Year shall be an �Entry Date.�Solely for purposes of subsection 2.1(d) (Eligibility Requirements) and the ability to participate in the Savings Programas an Eligible Limited Participant commencing April 1, 1999, each business day shall also be an �Entry Date.�

�ERISA� means the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder,as from time to time amended.

�Employer Excess Contribution� is the contribution defined in Section 3.1 (Employer Contributions).

�Excess Forfeiture Suspense Account� means the Account described in Section 5.12 (Limitations on AnnualAdditions).

�Excess Tentative Employer Contribution� means the excess contribution described in Section 5.12 (Limitations onAnnual Additions).

�Five-Percent Owner� means an employee described in Code Section 416(i)(1).

�Funds� means the separate investment funds as described in Section 5.2 (Common Fund).

�Health Plan� means a retiree medical plan maintained by an Employer, as described in Section 14.2 (Retiree MedicalBenefits Definitions).

�Highly Compensated Employee� means an employee of the Employer or an Affiliate who was a Participant eligibleduring the Plan Year to make Before-Tax Contributions and who:

a. was a Five-Percent Owner at any time during the Plan Year or the preceding Plan Year; or

b. received Total Compensation in excess of $80,000 (as adjusted for increases in the cost of living by theSecretary of the Treasury) during the preceding Plan Year and was among the top 20% of the employees(disregarding those employees excludable under Code Section 414(q)(5)) when ranked on the basis of TotalCompensation paid for that year.

To the extent required by Code Section 414(q)(6), a former employee who was a Highly Compensated Employee whenhe separated from service with the Employer and all Affiliates or at any time after attaining age 55 shall be treated as aHighly Compensated Employee.

�Hour of Service� is:

a. each hour for which an employee is paid or entitled to payment for the performance of duties for the Employeror an Affiliate;

b. each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by theEmployer or an Affiliate; and



c. each hour for which an employee is paid or entitled to payment for a period during which no duties areperformed (irrespective of whether the employment relationship has terminated) due to vacation, holiday,illness, incapacity, layoff, jury duty, military duty, or leave of absence. In crediting Hours of Service pursuantto this subparagraph (c), all payments made or due shall be taken into account, whether such payments aremade directly by the Employer or an Affiliate or indirectly (e.g., through a trust fund or insurer to which theEmployer or an Affiliate makes payments, or otherwise), except that:

i. no more than 501 such Hours of Service shall be credited for any continuous period during which theemployee performs no duties;

ii. no such Hours of Service shall be credited if payments are made or due under a plan maintainedsolely for the purpose of complying with any workers� compensation, unemployment compensationor disability insurance laws; and

iii. no such Hours of Service shall be credited for payments which are made solely to reimburse theemployee for medical or medically related expenses.

The Hours of Service, if any, for which an employee is credited for a period in which he performs no duties shallbe computed and credited to computation periods in accordance with 29 C.F.R. 2530.200b-2 and other applicableregulations promulgated by the Secretary of Labor. For purposes of computing the Hours of Service to be credited toan employee for whom a record of hours worked is not maintained, an employee shall be credited with 45 Hours ofService for each week in which he completes at least one Hour of Service. In addition, an employee shall be creditedwith Hours of Service for each week the employee is on a leave of absence in accordance with Section 2.4 (Leaves ofAbsence); provided however, that except as provided in Section 2.4 (Leaves of Absence), no more than 501 Hours ofService shall be credited with respect to any continuous period of a leave of absence.

�Individual Beneficiary� means a natural person designated by the Participant in accordance with Section 7.5(Beneficiary Designations) to receive all or any portion of the amounts remaining in the Participant�s Accounts atthe time of the Participant�s death. �Individual Beneficiary� also means a natural person who is a beneficiary of atrust designated by the Participant in accordance with Section 7.5 (Beneficiary Designations) to receive all or a portionof such amount, provided the trust complies with the requirements of Code Section 401(a)(9) and the regulationspromulgated thereunder, including that the trust is irrevocable, the beneficiaries with respect to the trust�s interest inthe Participant�s Accounts are identifiable from the trust agreement, and a copy of the trust agreement is provided tothe Administrative Committee prior to the date distributions commence to such trust.

�Intern Employee� means an employee who is hired on a temporary basis in connection with an intern programestablished by the Employer. If an Intern Employee is later offered a full-time position with Employer, such employeewill become an Eligible Employee, at that time, and will receive credit, for purposes of determining eligibility toparticipate under Section 2.1 (Eligibility Requirements), for Hours of Service accumulated as an Intern Employee.However, such employee will not be entitled to share in any benefits under the Program while he was classified as anIntern Employee.

�Investment Committee� is the Committee so appointed in accordance with Article 9 (Powers and Duties ofCommittees).

�Investment Manager� means a registered investment adviser or other entity, as described in Section 9.8 (InvestmentPolicy).

�Key Employee� means an employee described in Section 8.1 (Top-Heavy Definitions).

�Leased Employee� means any individual who is not carried on the payroll of the Employer or an Affiliate andwho, pursuant to an agreement between the Employer or an Affiliate and any other person (�leasing organization�),



has performed services for the Employer or an Affiliate (or a related person as determined in accordance with CodeSection 414(n)(6)) on a substantially full-time basis for a period of at least one year, and such services are performedunder primary direction or control by the Employer or Affiliate. Contributions or benefits provided a leased employeeby the leasing organization which are attributable to services performed for the Employer shall be treated as providedby the Employer.

�Limited Term Employee�means an employee whose employment is for a temporary basis and is classified as a limitedterm employee or a coop employee under the records of his Employer.

�Limitation Year� means the relevant Plan Year.

�Matching Contribution� is the contribution referred to in Section 3.6 (Matching Contribution Under the SavingsProgram).

�Maximum Annual Addition� is the amount defined in Section 5.12 (Limitations on Annual Additions).

�Medical Benefits� means the benefits described in Section 14.2 (Retiree Medical Benefits Definitions).

�Medical Benefits Account� means the account established in accordance with Code Section 401(h) as part of theRetirement Program for the purpose of providing retiree medical benefits, as described in Article 14 (Retiree MedicalBenefits).

�Member of a Collective Bargaining Unit� means any employee who is included in a collective bargaining unit andwhose terms and conditions of employment are or were covered by a collective bargaining agreement if there isevidence that retirement benefits were the subject of good-faith bargaining between representatives of such employeeand the Employer, unless such collective bargaining agreement makes this Plan applicable to such employee.

�Multiple Use� is described in Section 3.8 (Multiple Use).

�Non-Highly Compensated Employee� means, for any Plan Year, any employee of the Employer or Affiliate who:

a. at any time during the Plan Year was a Participant eligible to make Before-Tax Contributions, and

b. was not a Highly Compensated Employee for such Plan Year.

�Normal Retirement Date� means a Participant�s 65th birthday.

�One-Percent Owner� means an employee described in Code Section 416(i)(1).

�Participant� means:

a. a current employee of the Employer or an Affiliate who has become a Participant in the Plan pursuant tosubsections (a), (b), (c), (f), or (g) of Section 2.1 (Eligibility Requirements) or;

b. a former employee of the Employer or an Affiliate for whose benefit an Account in the Trust Fund ismaintained.

�Plan� means the Tellabs Advantage Program set forth herein, including all Appendices hereto.

�Permissive Aggregation Group� means the Required Aggregation Group of plans plus any other plan or plans of theEmployer which, when considered as a group with the Required Aggregation Group, would continue to satisfy therequirements of Code Sections 401(a)(4) and 410, as further referenced in Article 8 (Top-Heavy Plan Requirements).



�Plan Year� means a 12-month period beginning on January 1 and ending on December 31.

�Pre-Retirement Survivor Annuity� means the surviving spouse survivor annuity defined in Section 7.3 (Pre-Retirement Survivor Annuity � Retirement Account, Salix Account and Coherent Accounts).

�Present Value� means the present value of accrued benefits under the aggregated defined benefit plan or plans for allParticipants as of the Top-Heavy Determination Date(s), as determined in accordance with Code Section 416 and theregulations thereunder, as further defined in Article 8 (Top-Heavy Plan Requirements).

�Prior Plan� means prior versions of the Plan.

�Profit Sharing Contribution� means the contribution referred to in Section 3.3 (Profit Sharing Contribution under theSavings Program)

�Provisional Annual Addition� is the amount described in Section 5.11 (Provisional Annual Addition).

�Qualified Domestic Relations Order� means any domestic relations order that creates, recognizes or assigns toan Alternate Payee the right to receive all or a portion of Participant�s benefits payable hereunder and meets therequirements of Code Section 414(p).

�Qualified Joint and Survivor Annuity� for a married Participant, means an annuity for the life of a Participant witha survivor annuity for the life of the Participant�s surviving spouse equal to fifty percent (50%) of in the amount ofthe annuity which is payable during the joint lives of the Participant and his surviving spouse. The Qualified Joint andSurvivor Annuity shall be the actuarial equivalent of the Participant�s vested Account Balance.

�Qualified Military Service� means the performance of duty on a voluntary or involuntary basis in the UniformedServices of the United States by an Eligible Employee provided he is re-employed by the Employer or an Affiliatewithin the applicable time period specified in Chapter 43 of Title 38 of the United States Code (Employment andReemployment Rights of Members of the Uniformed Services) and the total length of all such absences does not exceedthe maximum specified by law for the retention of reemployment rights. The term �Uniformed Services of the UnitedStates� means the Armed Forces, the Army National Guard and the Air National Guard when engaged in active dutyfor training, inactive duty training, or full-time National Guard duty, or full-time duty in the commissioned corps of thePublic Health Service as defined in Chapter 43 of Title 38 of the United States Code.

�Required Aggregation Group� means (i) each qualified plan of the Employer in which at least one Key Employeeparticipates or participated at any time during the Determination Period (regardless of whether the plan has terminated),and (ii) any other qualified plan of the Employer which enables a plan described in subsection (i) above to meet therequirements of Code Sections 401(a)(4) or 410 as further referenced in Article 8 (Top-Heavy Plan Requirements).

�Required Beginning Date� means:

a. for a Participant who is not a Five-Percent Owner, the April 1 following the later of the calendar year in whichthe Participant attains age 70-1/2 or the calendar year in which the Participant terminates employment; or

b. for a Participant who is a Five-Percent Owner with respect to the Plan Year in which he attains age 70-1/2, theApril 1 following the calendar year in which he attained age 70-1/2.

�Retirement Contribution� means the contribution referred to in Section 3.2 (Retirement Contribution Under theRetirement Program).

�Retirement Program� means the provisions of this Plan relating to the Tellabs Retirement Plan, the money purchasepension plan which forms a part hereof.



�Rollover Contribution� means:

a. all or a portion of a distribution received by an employee from another qualified plan which is eligible for tax-free rollover to a qualified plan and which is rolled over by the employee to this Plan within 60 days followinghis receipt thereof;

b. amounts rolled over to this Plan from a conduit individual retirement account which has no assets other thanassets (and the earnings thereon) which were

i. previously distributed to the employee by another qualified plan as a distribution which is eligible fortax-free rollover to a qualified plan and

ii. deposited in such conduit individual retirement account within 60 days of receipt thereof;

c. amounts distributed to the employee from a conduit individual retirement account meeting the requirements of(b) above, and rolled over by the employee to this Plan within 60 days of his receipt thereof from such conduitindividual retirement account;

d. amounts rolled over directly to this Plan by the trustee of another qualified plan pursuant to the provisions ofCode Section 401(a)(31) and to any other related laws and regulations as in effect at the time of such directrollover; and

e. any amounts distributed from another qualified plan will not be eligible as a Rollover Contribution if suchmoney had been contributed to that plan as an after-tax contribution.

�Salix Accounts� means the separate Salix Before-Tax Account, Salix Employer Account and Salix Rollover Accountof Salix Participants described in Section 5.1 (Participant Accounts).

�Salix Acquisition Date� means the date of the acquisition of Salix Technologies, Inc. by Tellabs, Inc.

�Salix Participant� means employees of Salix Technologies, Inc. or any subsidiary thereof who were participants in theSalix Plan on May 19, 2000 and (a) became Participants in the Plan on May 19, 2000, or (b) whose Salix Accounts weresubsequently transferred from the Salix Plan to the Trust Fund as a result of the merger of the Salix Plan into the Planeffective May 19, 2000.

�Salix Plan� means the Salix Technologies, Inc. 401(k) Plan as in effect on the Salix Acquisition Date, and as amendedfrom time to time thereafter up to and including its merger into the Plan effective May 19, 2000.

�Savings Program� means the provisions of the Plan relating to the Tellabs Profit Sharing and Savings Plan, a profitsharing and Code Section 401 savings and matching contribution plan which forms a part hereof.

�Service� means the period credited to an Eligible Employee or Participant for purposes of determining the level ofa Participant�s nonforfeitable benefits under the Tellabs Retirement Program. A Participant�s or Eligible Employee�sService shall be the period beginning on his Employment Commencement Date (or Re-employment CommencementDate, if applicable) and ending on his Termination Date, computed in accordance with the following rules:

a. Special Definitions.

i. �Employment Commencement Date� means the date an employee first performs an Hour of Service.

ii. �Termination Date� means the earlier of:



A. The date on which an employee quits, retires, is discharged or dies; or

B. The first anniversary of the first day of a period in which an employee remains absent fromservice (with or without pay) for any reason other than a quit, retirement, discharge or death,such as vacation, holiday, sickness, disability, leave of absence or layoff, except that thisclause (B) shall not apply to an employee on leave of absence for service in the United Statesarmed forces or the Family and Medical Leave Act of 1993.

iii. �Re-employment Commencement Date� means the date on which an employee first performs anHour of Service following a Period of Severance.

iv. �Period of Severance� means the period beginning on an employee�s Termination Date and endingon his Re-employment Commencement Date.

v. �Year of Service� means each full year (on the basis that 365 days equal a full year) in theemployee�s period of Service.

c. Aggregation Rule. All of an employee�s periods of Service with any Affiliate shall be aggregated on the basisthat 365 days equal a full year, except that if an employee has a Period of Severance of five years or more:

i. The prior period of Service shall be disregarded unless (A) his Retirement Account was nonforfeitableat the time the Period of Severance began or (B) the Period of Severance is less than the prior periodof Service, and

ii. Any period of Service after such Period of Severance shall be disregarded in determining the vestedpercentage of his Retirement Account which accrued before the Period of Severance.

c. Service Spanning Rule. If an employee�s Re-employment Commencement Date occurs within 12 monthsafter his Termination Date, his Service shall include the intervening Period of Severance.

d. Service with Predecessor and Related Employers. An employee�s period of service,

i. with another employer before the acquisition of that employer�s business by the Employer shall, tothe extent provided in the agreement pertaining to such acquisition or as approved by the Board ofDirectors, be included in his Service to the same extent as if such service was performed for theEmployer, provided however, that in no event shall any service prior to January 6, 1975 be deemedService hereunder; and

ii. with any employer while such employer is an Affiliate shall be included in his Service to the sameextent as if such service was performed for the Employer, provided however, that in no event shallany service prior to January 6, 1975 be deemed Service hereunder.

c. Recognition of Services under Salix Plan and Coherent Plan. Solely with respect to former Salix Participantsand Coherent Participants, each such Participant�s period of service shall include such period or periods ofemployment previously credited to that Participant under the Salix Plan or Coherent Plan, as applicable;provided, however, that in no event shall any service prior to January 6, 1975 be deemed Service hereunder.

�Simplified Employee Pension Plan� means a plan designed to meet the requirements of a simplified pension planpursuant to Code Section 408(k), as further referenced in Article 8 (Top-Heavy Plan Requirements) andsubsection 11.6(c).



�Supplemental Before-Tax Contribution� means for any period, with respect to a Participant, the portion of the Before-Tax Contribution made on his behalf by an Employer during such period which exceeds such Participant�s BasicBefore-Tax Contribution for such period. For any period, �Supplemental Before-Tax Contribution�means, with respectto the Employer, the sum of such contributions.

�Tellabs Stock Fund� is the Fund described in Section 5.2 (Common Fund).

�Tentative Employer Contribution� is the contribution described in Section 3.3 (Profit Sharing Contribution Under theSavings Program).

�Top-Heavy� describes a plan which is determined to be Top-Heavy in accordance with Code Section 416 as furtherdetailed in Section 8.1 (Top-Heavy Definitions).

�Top-Heavy Determination Date� means, for any Plan Year subsequent to the first Plan Year, the last day of thepreceding Plan Year or, for the first Plan Year of the Plan, the last day of that year as further described in Section 8.1(Top-Heavy Definitions).

�Top-Heavy Ratio� means the ratio set forth in Code Section 416, as further described in Section 8.1 (Top-HeavyDefinitions).

�Trust� or �Trust Fund� means the Tellabs, Inc. Profit Sharing and Savings Trust or such other trust established inaccordance with Article 9 (Powers and Duties of Committees).

�Trustee� means the Trustee or Trustees under the Trust referred to in Article 9 (Powers and Duties of Committees).

�Unit� means the unit of measure (determined as provided in Article 5 (Accounting Provisions and Allocations) ofthe proportionate measure, if any, of the Accounts of a Participant in the investment Funds established pursuant toSection 5.2 (Common Fund).

�Valuation Date� means each Business Day as of which the Administrative Committee shall determine the value ofeach Account.

SECTION 1.5 EGTRRA Compliance. This Plan reflects certain provisions of the Economic Growth and TaxRelief Reconciliation Act of 2001 (�EGTRRA�). The provisions of the Plan relating to EGTRRA are intended todemonstrate good faith compliance with the requirements of EGTRRA and are to be construed in accordance withEGTRRA and guidance issued thereunder, including but not limited to IRS Notice 2001-57. Except as otherwiseprovided, the provisions of the Plan relating to EGTRRA shall be effective as of the first day of the 2002 Plan Year, andshall supercede other provisions of the Plan to the extent such provisions are inconsistent therewith.

ARTICLE 2

Eligibility and Participation

SECTION 2.1 Eligibility Requirements.

a. Every Participant on January 1, 1997 shall continue as such subject to the provisions of the Plan.



b. Every other Eligible Employee shall first be eligible to participate in the Matching Contribution, the ProfitSharing Contribution and the Retirement Contribution provisions of the Plan, if he is then employed by anEmployer, on the Entry Date coinciding with or next following his first nine (9) months of continuousemployment, if he has completed 1,000 Hours of Service during such nine (9) month period and attained his21st birthday (18th birthday, commencing with the April 1, 1999 Entry Date) on or before such Entry Date.An Eligible Employee who does not become a Participant pursuant to the preceding sentence shall first beeligible to participate, if he is then employed by an Employer, on the Entry Date coinciding with or nextfollowing the later of (i) the end of the first Eligibility Period in which he completes 1,000 Hours of Service or(ii) his 21st birthday (18th birthday, commencing with the April 1, 1999 Entry Date).

c. Any former employee of the Employer or an Affiliate who was a Participant or could have become aParticipant under subsection (b) above had he been employed on a prior Entry Date, and is reemployed by theEmployer as an Eligible Employee, shall be eligible to participate on the first Entry Date after reemployment.

d. Notwithstanding any provisions of this Section 2.1 to the contrary, an Eligible Employee who does not meetthe requirements of paragraph (a), (b) or (c) above and who is reasonably expected to meet the requirementsof paragraph (b) shall first be eligible to participate in the Plan as an Eligible Limited Participant on the EntryDate coinciding with or next following the later of his Employment Commencement Date or 21st birthday(18th birthday, commencing with the April 1, 1999 Entry Date), solely for purposes of making a Before-TaxContribution pursuant to Section 3.4 (Before-Tax Contributions under the Savings Program) (but not forpurposes of receiving a Matching Contribution with respect thereto) and/or a Participant RolloverContribution pursuant to Section 4.2 (Rollover Contribution), and exercising rights with respect to theAccount(s) established thereby.

e. Notwithstanding any provisions of this Plan to the contrary, any individual who was providing services to theEmployer in the capacity of, or who was designated by the Employer as, an independent contractor, a LeasedEmployee, or a Limited Term Employee and who is subsequently re-classified as an Eligible Employee for thepurposes of this Plan (regardless of whether such re-classification is retrospective or prospective), shall beeligible to participate in the Plan on a prospective basis only from the date of the re-classification and shall nothave any retroactive claim for benefits.

f. Notwithstanding the foregoing provisions of this Section 2.1 (Eligibility Requirements) a Coherent Participantwho is an Eligible Employee on January 1, 1999 shall become a Participant as of that date. Any otherindividual who was an employee of Coherent Communications Systems Corporation or any subsidiary thereofand first became an Eligible Employee on January 1, 1999, shall become a Participant on the first Entry Dateon which such Eligible Employee�s satisfies the requirements of paragraph (b), (c), or (d) above, as the casemay be.

g. Notwithstanding the foregoing provisions of this Section 2.1 (Eligibility Requirements) a Salix Participantwho is an Eligible Employee on May 19, 2000 shall become a Participant as of that date.

SECTION 2.2 Continued Participation; Reemployment.

a. Except as provided in Section 2.3 (Transfers and Changes in Status), once an Eligible Employee has become aEligible Limited Term Participant eligible to elect to make Before-Tax Contributions pursuant tosubsection 2.1(d), he shall continue to be eligible to make such Contributions, subject to the conditions andlimitations in the Plan, until he incurs his Termination Date.

b. Except as provided in Section 2.3 (Transfer and Changes in Status), once an Eligible Employee becomes aParticipant for purposes of determining the amount of the Matching Contribution, the Profit SharingContribution and the Retirement Contribution and eligibility to share in the Matching Contribution, the ProfitSharing Contribution and the Retirement Contribution, he shall continue to be eligible to share in the



Matching Contribution, the Profit-Sharing Contribution and the Retirement Contribution, subject to theconditions and limitations in the Plan, for each Plan Year as provided in Section 5.4 (Eligibility to Share in theEmployer Contributions and Forfeiture).

c. In the event an Eligible Employee who has become a Participant incurs his Termination Date and he issubsequently reemployed, he shall be eligible to elect to make Before-Tax Contributions as of the firstbusiness day following such Re-Employment Commencement Date and to share in the MatchingContribution, the Profit Sharing Contribution and the Retirement Contribution for the Plan Year in which hisRe-Employment Commencement Date occurs, provided the Participant is an Eligible Employee and, withrespect to the Matching Contribution, the Profit Sharing Contribution and the Retirement Contribution,satisfies the requirements of Section 5.4 as of the first Entry Date after he becomes eligible - (Eligibility toShare in the Employer Contributions and Forfeiture).

SECTION 2.3 Transfers and Changes in Status.

a. As provided in Section 1.4 (Definitions), an Eligible Employee�s Service with

i. an Employer while a Member of a Collective Bargaining Unit before his transfer to an employmentstatus outside of the collective bargaining unit, or

ii. another employer before the acquisition of that employer�s business by an Employer (but only to theextent approved by the Board of Directors and exclusive of any period prior to January 6, 1975), or

iii. another employer while such employer is a Related Employer prior to the date the Employee istransferred to an Employer,

shall be taken into account (applying the principles of Sections 2.1 (Eligibility Requirements) and 2.2(Continued Participation Reemployment)) for purposes of determining the Eligible Employee�s eligibility toparticipate in the Plan. In the event that based upon such service, the Eligible Employee would have becomea Participant as of an Entry Date had he been an Eligible Employee of the Employer, then such EligibleEmployee shall become a Participant for purposes of Section 2.1 (Eligibility Requirements) as of the date ofsuch acquisition or transfer provided he is an Eligible Employee as of such date.

d. If a Participant is transferred to a position with an Employer such that he no longer is an Eligible Employee, oris transferred to employment with an Affiliate which is not an Employer, he shall be treated for all purposesunder this Plan as if he were on a leave of absence without Compensation while in that position.

SECTION 2.4 Leaves of Absence. An employee shall be credited with 45 Hours of Service for each full weekthe employee is on a leave of absence, including, but not limited to a leave of absence required to be recognized underthe provisions of the Retirement Equity Act of 1984 or the Family and Medical Leave Act of 1993, if he is not otherwisecredited with such Hours of Service, provided that other than with respect to a leave of absence for service in the UnitedStates armed forces, not more than 501 Hours of Service shall be credited with respect to any continuous period of leaveof absence. Any leave of absence under this Section 2.4 must be granted in writing and pursuant to the Employer�sestablished leave policy, which shall be administered in a uniform and nondiscriminatory manner to similarly situatedemployees.

SECTION 2.5 Qualified Military Service. Notwithstanding any provision of this Plan to the contrary, effective onand after December 12, 1994, contributions, benefits and service credit with respect to Qualified Military Service willbe provided in accordance with Code Section 414(u).



ARTICLE 3

Contributions

SECTION 3.1 Employer Contributions. Subject to the right reserved to the Company to alter, amend ordiscontinue this Plan and the Trust, each Employer shall for each Plan Year contribute to the Trust Fund an amountequal to the sum of:

a. the Retirement Contribution;

b. the Profit Sharing Contribution;

c. the Before-Tax Contribution; and

d. the Matching Contribution.

Such sum, which is known as the Tentative Employer Contribution, shall be reduced by an amount equal to the ExcessTentative Employer Contribution (as provided in Section 5.12 (Limitation on Annual Additions)); provided that in noevent shall the Tentative Employer Contribution, as reduced by the Excess Tentative Employer Contribution, exceedthe amount deductible by the Employer for said year for federal income tax purposes.

In addition, each Employer shall contribute to the Medical Benefits Account maintained as part of the Trust Fund suchamounts as may be determined in accordance with Article 14 (Retiree Medical Benefits) hereof.

SECTION 3.2 Retirement Contribution Under the Retirement Program. Subject to the provisions of Section 3.1(Employer Contributions), each Employer shall pay to the Trustee for each quarter of each Plan Year an amount which,together with the forfeitures allocable for such quarter, shall be equal to:

a. 4.5% (four and five-tenths percent) effective January 1, 1999; or

b. 3.6% (three and six-tenths percent) effective January 1, 1994;

of the Considered Compensation of each Eligible Participant for such quarter. Such contribution is known as the�Retirement Contribution.�

SECTION 3.3 Profit Sharing Contribution Under the Savings Program. Subject to the provisions of Section 3.1(Employer Contributions):

a. Each Employer shall pay to the Trustee for each quarter of each Plan Year an amount which, together with theforfeitures allocable for such quarter, shall be equal to .5% (five-tenths of one percent) of the ConsideredCompensation of each Eligible Participant for such quarter; and

b. Each Employer shall also pay to the Trustee for each Plan Year such additional amounts, if any, as the Boardof Directors shall determine.

Such contributions are, collectively, known as the �Profit Sharing Contribution.�



SECTION 3.4 Before-Tax Contributions Under the Savings Program.

a. Subject to the provisions of Sections 3.1 (Employer Contributions) and 3.3 (Profit Sharing ContributionsUnder the Savings Program), each Active Participant may for each payroll period elect to have the Employermake a Basic Before-Tax Contribution on his behalf in an amount 1% up to 15% (effective January 1, 2002,up to 20%) of his Considered Compensation (rounded to the nearest cent). Such elections (other than acomplete suspension of Before-Tax Contributions under this Section) shall be subject to change effective onany Entry Date in accordance with procedures established by the Administrative Committee from time totime. A Participant may elect to have his Employer suspend all Before-Tax Contributions to be made on hisbehalf under this Section 3.4 as of the beginning of any payroll period provided he notifies such Employerwithin such time and in accordance with such procedures as may from time to time be established by theAdministrative Committee.

b. The Administrative Committee may establish procedures whereby each Eligible Participant on whose behalfthe total contribution made under Section 3.4(a) is less than 15% (effective January 1, 2002, less than 20%) ofhis Considered Compensation for the Plan Year may, subject to the provisions of Section 3.1 (EmployerContributions) and 3.5 (Limitations on Before-Tax Contributions Under the Savings Program), elect to havehis Employer make an additional contribution on his behalf in an amount not exceeding his annual incentivecash bonus for such Plan Year so long as the sum of such additional contribution and the contributions madeon his behalf under subsection 3.4(a) above does not exceed 15% (effective January 1, 2002, does not exceed20%) of his Considered Compensation for the Plan Year.

c. The amount of the Before-Tax Contributions to be made pursuant to a Participant�s election shall reduce thecompensation otherwise payable to him by the Employer.

SECTION 3.5 Limitations on Before-Tax Contributions Under the Savings Program.

a. In no event shall a Participant�s Before-Tax Contributions during any calendar year exceed the dollarlimitation in effect under Code Section 402(g) at the beginning of such calendar year; provided, however that:

i. contributions made under Section 2.5 (Qualified Military Service) shall be subject to such limitationfor the year to which they relate instead of the year they are actually made; and

ii. effective as of the first day of the first Plan Year beginning after December 31, 2001, all employeeswho are eligible to make elective deferrals under this Plan and who have attained age 50 before theclose of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subjectto the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into accountfor purposes of the provisions of the Plan implementing the required limitations of Code Sections402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Planimplementing the requirements of Code Sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416, asapplicable, by reason of any such catch-up contributions.

If a Participant�s Before-Tax Contributions, together with any additional elective contributions to any otherqualified cash or deferred arrangement, and any elective deferrals under a tax-sheltered annuity program or asimplified employee pension plan, exceed such dollar limitation for any calendar year, such excess, and anyearnings allocable thereto, shall be distributed to the Participant by April 15 of the following year; providedthat, if such excess contributions were made to a plan or arrangement not maintained by the Employer or anAffiliate, the Participant must first notify the Administrative Committee of the amount of such excess allocableto this Plan by March 1 of the following year.

c. Notwithstanding any other provision of this Plan to the contrary, the Before-Tax Contributions for the HighlyCompensated Employees for the Plan Year shall be reduced in accordance with the following provisions:



i. The Before-Tax Contributions of the Highly Compensated Employees shall be reduced if neither ofthe Actual Deferral Percentage Tests set forth in (A) or (B) below is satisfied after taking into accountthe provisions of subsection (f) below:

A. The 1.25 Test. The Actual Deferral Percentage of the Highly Compensated Employees is notmore than the Actual Deferral Percentage of the Non-Highly Compensated Employeesmultiplied by 1.25.

B. The 2.0 Test. The Actual Deferral Percentage of the Highly Compensated Employees is notmore than 2 percentage points greater than the Actual Deferral Percentage of the Non-HighlyCompensated Employees and the Actual Deferral Percentage of the Highly CompensatedEmployees is not more than the Actual Deferral Percentage of the Non-Highly CompensatedEmployees multiplied by 2.0.

The provisions of this subsection (b) shall apply separately with respect to each group of employeeswho are Members of a Collective Bargaining Unit (if any) and the group of employees who are notMembers of a Collective Bargaining Unit.

iii. As used in this subsection, �Actual Deferral Percentage� means:

A. With respect to Non-Highly Compensated Employees, the average of the ratios of each Non-Highly Compensated Employee�s Before-Tax Contributions with respect to the prior PlanYear, to each such Participant�s Considered Compensation for such Plan Year; and

B. With respect to Highly Compensated Employees, the average of the ratios of each HighlyCompensated Employee�s Before-Tax Contributions with respect to the current Plan Year, toeach such Participant�s Considered Compensation for such Plan Year.

iii. All Before-Tax Contributions made under this Plan and all before-tax contributions made under anyother plan that is aggregated with this Plan for purposes of Code Sections 401(a)(4) and 410(b) shallbe treated as made under a single plan. If any plan is permissively aggregated with this Plan forpurposes of Code Section 401(k), the aggregated plans must also satisfy Code Sections 401(a)(4) and410(b) as though they were a single plan. The Actual Deferral Percentage ratios of any HighlyCompensated Employee will be determined by treating all plans subject to Code Section 401(k) underwhich the Highly Compensated Employee is eligible as a single plan. Notwithstanding the foregoing,Before-Tax Contributions made under Section 2.5 (Qualified Military Service) corresponding to apreceding Plan Year shall not be included in the Actual Deferral Percentage Test.

iv. If neither Actual Deferral Percentage Test is satisfied as of the end of the Plan Year, theAdministrative Committee shall cause the Before-Tax Contributions for Highly CompensatedEmployees to be reduced and refunded to each such Highly Compensated Employee in accordancewith this subsection (iv) and subsection (v), respectively, until either Actual Deferral Percentage Testis satisfied. The sequence for determining the amount of such reductions shall begin with HighlyCompensated Employees who elected to defer the greatest percentage of Considered Compensation,assuming that Supplemental Before-Tax Contributions represent the last contribution made to theParticipant�s Account, then the second greatest percentage amount, continuing until either ActualDeferral Percentage Test is satisfied. This process shall continue through the remaining SupplementalBefore-Tax Contributions and continuing with the Basic Before-Tax Contributions until either ActualDeferral Percentage Test is satisfied.

v. Once the total amount of reductions has been determined under subsection (iv) above, theAdministrative Committee shall direct the Trustee to distribute as a refund to the appropriate Highly



Compensated Employees an allocable portion of such reduction attributable to excess Before-TaxContributions, together with the net earnings or losses allocable thereto. The sequence for determiningand refunding a Highly Compensated Employee�s allocable portion of excess Before-TaxContributions shall begin with the Highly Compensated Employee who elected to defer the greatestdollar amount of Before-Tax Contributions. The Before-Tax Contributions of such Participant shallbe reduced by the amount required to cause that Participant�s Before-Tax Contributions to equal thedollar amount of the Before-Tax Contributions of the Highly Compensated Employee with the nexthighest dollar amount of Before-Tax Contributions. If the total amount distributed is less than the totalexcess contributions, this process shall continue until all excess Before-Tax Contributions aredistributed and excess Matching Contributions are forfeited. However, notwithstanding anything inthe foregoing to the contrary, if a lesser reduction, when added to the total dollar amount previouslyreduced, would equal the total excess contributions, such lesser reduction shall be utilized. TheAdministrative Committee shall designate such distribution and forfeiture as a distribution of excessBefore-Tax Contributions and forfeiture of excess Matching Contributions, determine the amount ofthe allocable net earnings or losses to be distributed and forfeited in accordance with subsections (c)and (d) below, and cause such distributions and forfeitures to occur prior to the end of the Plan Yearfollowing the Plan Year in which the excess Before-Tax Contributions and excess MatchingContributions were made.

b. Net earnings or losses to be distributed with the excess Before-Tax Contributions shall be equal to the netearnings or losses on such contributions for the Plan Year in which the contributions were made. The netearnings or losses allocable to the excess Before-Tax Contributions for the Plan Year shall be determined inthe manner set forth in Article 5 (Accounting Provisions and Allocations).

c. Net earnings or losses to be treated as forfeitures together with the Matching Contributions shall be equal tothe net earnings or losses on such contributions for the Plan Year in which the contributions were made. Netearnings or losses on Matching Contributions shall be determined in the same manner as in subsection (c)above.

d. Any excess Matching Contribution treated as a forfeiture pursuant to subsection (b) above shall be used toreduce the Profit Sharing Contribution in Section 3.3 (Profit Sharing Contribution Under the SavingsProgram).

e. For the purpose of avoiding the necessity of adjustments pursuant to this Section or Section 5.12 (Limitationson Annual Additions), or to comply with any applicable laws or regulations:

i. The Administrative Committee may adopt such rules as it deems necessary or desirable to:

A. impose limitations during a Plan Year on the percentage or amount of Before-TaxContributions elected by Participants pursuant to Section 3.2 (Retirement Contribution Underthe Retirement Plan); or

B. increase during a Plan Year the percentage of Considered Compensation with respect towhich a Participant may elect a Before-Tax Contribution for the purpose of providingParticipants with the opportunity to increase their Before-Tax Contributions within thelimitations of Section 3.3 (Profit Sharing Contribution Under the Savings Program).

iii. The Employer may at its sole discretion make fully vested contributions to the Plan which will beallocated to the Before-Tax Accounts of one or more Participants who are Non-Highly CompensatedEmployees in such amounts as the Employer directs for the purpose of complying with the applicablelimits on Before-Tax Contributions in the Code. Such contributions will not be taken into account inthe allocation of Matching Contributions.



b. The amount of each Participant�s Basic Before-Tax Contributions and Supplemental Before-TaxContributions as determined under this Section 3.5 is also subject to the provisions of Sections 5.12(Limitations on Annual Additions).

SECTION 3.6 Matching Contribution Under the Savings Plan. Subject to the provisions of Section 3.1(Employer Contributions), each Employer shall each payroll period of the Plan Year contribute to the Trust Fund 1 centfor each cent of Basic Before-Tax Contribution made on behalf of each Eligible Participant for such payroll period.Each Employer shall also contribute as of the last day of the Plan Year on behalf of each Eligible Participant employedby the Employer on the last day of such Plan Year an amount equal to each such Participant�s Basic Before-TaxContribution for the Plan Year less the amount of the payroll period contributions made during such Plan Year pursuantto the first sentence of this Section 3.6 on behalf of each such Participant. The sum of such contributions is known asthe �Matching Contribution.�

SECTION 3.7 Limitations on Matching Contributions Under the Savings Program

• Notwithstanding any other provision to the contrary, the share of Matching Contributions of the Highly CompensatedEmployees shall be reduced in accordance with the following provisions:

i. The share of Matching Contributions of the Highly Compensated Employees shall be reduced if neither of theContribution Percentage Tests set forth in (A) or (B) below is satisfied after taking into account the provisionsof subsection (f) below:

A. The 1.25 Test. The Contribution Percentage of the Highly Compensated Employees is not more thanthe Contribution Percentage of all Non-Highly Compensated Employees multiplied by 1.25.

B. The 2.0 Test. The Contribution Percentage of the Highly Compensated Employees is not more than 2percentage points greater than the Contribution Percentage of all Non-Highly CompensatedEmployees, and the Contribution Percentage of the Highly Compensated Employees is not more thanthe Contribution Percentage of all Non-Highly Compensated Employees multiplied by 2.0.

The provisions of this subsection (a) shall not apply to any group of employees who are Members of aCollective Bargaining Unit.

iii. As used in this Section 3.7, �Contribution Percentage� means:

A. With respect to Non-Highly Compensated Employees, the average of the ratios of each Non-HighlyCompensated Employee�s share of Matching Contributions, plus Designated Before-TaxContributions (as defined in subsection (b) below), with respect to the prior Plan Year, to each suchParticipant�s Considered Compensation for such Plan Year; and

B. With respect to Highly Compensated Employees, the average of the ratios of each HighlyCompensated Employee�s share of Matching Contributions, plus Designated Before-TaxContributions (as defined in subsection (b) below), with respect to the current Plan Year, to each suchParticipant�s Considered Compensation for such Plan Year.

iii. All Matching Contributions made under this Plan and all employee contributions and matching contributionsmade under any other plan that is aggregated with this Plan for purposes of Code Sections 401(a)(4) and410(b) shall be treated as made under a single plan. If any plan is permissively aggregated with this Plan forpurposes of Code Section 401(m), the aggregated plans must also satisfy Code Sections 401(a)(4) and 410(b)as though they were a single plan. The Contribution Percentage ratio of any Highly Compensated Employeewill be determined by treating all plans subject to Code Section 401(m) under which the Highly CompensatedEmployee is eligible as a single plan. Notwithstanding the foregoing, Matching Contributions made under



Section 2.5 (Qualified Military Service) corresponding to a preceding Plan Year shall not be included in theContribution Percentage Test.

• To the extent necessary, and solely for the exclusive purpose of satisfying the Contribution Percentage Test insubsection 3.7(a), all or part of the Before-Tax Contributions of Participants and/or Matching Contributions may betreated by the Committee as After-Tax Contributions (�Designated Before-Tax Contributions�), provided that each ofthe following is satisfied:

i. The Before-Tax Contributions, including Designated Before-Tax Contributions, satisfy the requirements ofsubsection 3.5(b); and

ii. The Before-Tax Contributions, excluding Designated Before-Tax Contributions, satisfy the requirements ofsubsection 3.5(b).

• If neither Contribution Percentage Test is satisfied as of the end of the Plan Year, the Committee shall first cause theMatching Contributions of the Highly Compensated Employees to be reduced and refunded or forfeited, as the casemay be, in accordance with this subsection (c) and subsection (d) below until either Contribution Percentage Test issatisfied. The sequence for determining the amount of such reductions shall begin with Highly CompensatedEmployees who received the greatest amount of Matching Contributions as a percentage of Considered Compensation,then the second greatest percentage amount, continuing until either Contribution Percentage Test is satisfied. Thisprocess shall continue through the remaining Matching Contributions for Highly Compensated Employees until eitherContribution Percentage Test is satisfied.

• Once the total amount of reductions has been determined under subsection (c) above, the Committee shall direct theTrustee to distribute as a refund to the appropriate Highly Compensated Employees an allocable portion of suchreduction attributable to any excess vested Matching Contribution, and to treat as a forfeiture an allocable portion ofsuch reduction attributable to any excess nonvested Matching Contributions, together with the net earnings or lossesallocable thereto. The sequence for determining and refunding a Highly Compensated Employee�s allocable portion ofexcess vested Matching Contributions or forfeiture of nonvested Matching Contributions shall begin with the HighlyCompensated Employee who elected and received the greatest dollar amount of such contributions. The MatchingContributions of such Participant shall be reduced by the amount required to cause that Participant�s MatchingContribution to equal the dollar amount of the Matching Contributions of the Highly Compensated Employee with thenext highest dollar amount of such contributions. If the total amount distributed or forfeited is less than the total excesscontributions, this process shall continue until all such excess Matching Contributions have been distributed orforfeited. However, notwithstanding anything in the foregoing to the contrary, if a lesser reduction, when added to thedollar amount previously reduced, would equal the total excess contribution, such lesser amount shall be utilized. TheCommittee shall designate such distribution and forfeiture as a distribution and forfeiture of excess contributions,determine the amount of the allocable net earnings or losses to be distributed in accordance with subsection (e) below,and cause such distributions and forfeitures to occur prior to the end of the Plan Year following the Plan Year in whichsuch excess Matching Contributions were made.

• Net earnings or losses to be distributed with the excess vested Matching Contribution or to be treated as forfeiturestogether with the excess nonvested Matching Contributions shall be equal to the net earnings or losses on suchcontributions for the Plan Year in which the contributions were made. Net earnings or losses shall be determined andallocated in the same manner as in subsection 3.5(c) above.

• Any Matching Contributions which are treated as forfeitures pursuant to subsection 3.7(d) above shall be used toreduce the Profit-Sharing Contribution in Section 3.3 (Profit-Sharing Contribution Under the Savings Plan) andMatching Contribution in Section 3.6 (Matching Contribution Under the Savings Plan).

• For the purpose of avoiding the necessity of adjustments pursuant to this Section 3.7 or Section 5.12 (Limitations onAnnual Additions), or to comply with any applicable laws or regulations:



i. The Employer may in its sole discretion make fully vested contributions to the Plan, which will be allocated tothe Matching Accounts of one or more Participants who are Non-Highly Compensated Employees, in suchamounts as the Employer directs for the purpose of complying with applicable limits on MatchingContributions in the Code.

ii. The Committee, in its sole discretion, may elect for a Plan Year to perform the test under subsection (b) aboveseparately for those Active Participants who have not yet attained age 21 and completed one Year of Serviceor, alternatively, for Plan Years beginning after December 31, 1998, exclude such Active Participants who areNon-Highly Compensated Employees from testing under subsection (c) above.

SECTION 3.8 Multiple Use. The multiple use test described in Treasury Regulation Section 1.401(m)-2 and thisSection 3.8 shall not apply for Plan Years beginning after December 31, 2001.

a. This Section 3.8 will be applicable if The 2.0 Test is used to satisfy both the Actual Deferral Percentage Testand the Contribution Percentage Test. If this Section 3.8 is applicable, the Committee shall determine whethera �Multiple Use� has occurred, and if such a Multiple Use has occurred, the Matching Contributions of theHighly Compensated Employees shall be reduced in accordance with the provisions of subsection (c) below.

b. A Multiple Use occurs when for the Highly Compensated Employees, the sum of the Actual DeferralPercentage used to satisfy The 2.0 Test plus the Contribution Percentage used to satisfy The 2.0 Test exceedsthe �Aggregate Limit.� The Aggregate Limit is the greater of subsection (i) or (ii) below, determined asfollows:

i. First, multiply 1.25 by the greater of:

A. the Actual Deferral Percentage, or

B. the Contribution Percentage of the Non-Highly Compensated Employees;

iii. Second, add 2.0 to the lesser of (A) or (B) above provided that such sum shall not exceed 2 times thelesser of (A) or (B) above; and

iv. Finally, add the results from the first and second steps above to determine the Aggregate Limit; or

v. First, multiply 1.25 by the lesser of

A. the Actual Deferral Percentage, or

B. the Contribution Percentage of the Non-Highly Compensated Employees;

iii. Second, add 2.0 to the greater of (A) or (B) above provided that such sum shall not exceed 2 times thegreater of (A) or (B) above; and

iv. Third, add the results from the first and second steps above to determine the Aggregate Limit.

b. If a Multiple Use has occurred, such Multiple Use shall be corrected by reducing the Contribution Percentageof Highly Compensated Employees in accordance with the provisions of subsection 3.7(b) above until the sumof the Actual Deferral Percentage plus the Contribution Percentage for the Highly Compensated Employeesequals the Aggregate Limit.

c. Net earnings or losses to be refunded or to be treated as forfeitures together with the excess MatchingContributions shall be equal to the net earnings or losses on such contributions for the Plan Year in which the



contributions were made. Net earnings or losses shall be determined and allocated in the same manner as insubsection 3.5(c) above.

ARTICLE 4

Contributions by Employee

SECTION 4.1 No After-Tax Contributions. No Participant shall be required or permitted to make any after-taxcontributions to this Plan.

SECTION 4.1 Rollover Contribution.

a. A Rollover Contribution may be rolled over in cash to the Trust Fund for the benefit of a Participant with thepermission of the Administrative Committee. Prior to accepting any contribution which is intended to be aRollover Contribution, the Administrative Committee may require the Participant to establish that the amountto be rolled over meets the definition of a Rollover Contribution and any other limitations of the Codeapplicable to such rollovers.

b. An Eligible Employee who is not eligible to participate in the Plan solely by reason of failing to meet theeligibility requirements of Article 2 (Eligibility and Participation) and who reasonably expects to become aParticipant when such requirements are met, may be a Participant in the Plan solely for the limited purposes ofmaking a Rollover Contribution, and taking actions with respect to his Rollover Account for the purposes ofloans in accordance with Article 7 (Distributions), investment options in accordance with this Section 4.2, andthe withdrawal of Rollover Contributions in accordance with subsection (e) below, subject to the sameconditions as any other Participant.

c. If the Administrative Committee determines after a Rollover Contribution has been made that such RolloverContribution did not in fact constitute a Rollover Contribution as defined in Section 1.4 (Definitions), theamount of such Rollover Contribution and any earnings thereon shall be returned to the employee.

d. Each Participant�s Rollover Contribution shall be allocated to his Rollover Account as of the Valuation Datecoinciding with or next succeeding the date on which such amount is received by the Trustee, and invested inaccordance with Section 5.2 (Common Fund). A Participant�s Rollover Account shall be fully vested andnonforfeitable.

ARTICLE 5

Accounting Provisions and Allocations

SECTION 5.1 Participant�s Accounts.

a. For each Participant there shall be maintained as appropriate a separate Retirement Account, a separate ProfitSharing Account (which shall, if applicable, consist of separate pre-1993 and post-1992 sub-accounts asprescribed by the Administrative Committee), a separate Matching Account, a separate After-Tax Account



(which shall, if applicable, consist of a separate pre-1987 After-Tax sub-account and a separate post-1986After-Tax sub-account as prescribed by the Administrative Committee), a separate Before-Tax Account(which shall, if applicable, consist of separate basic and supplemental sub-accounts as prescribed by theAdministrative Committee), and a separate Rollover Account. Effective April 1, 1999, for each CoherentParticipant, there shall also be maintained as appropriate a separate Coherent Before-Tax Account (whichshall consist of a balance of the Coherent Participant�s pre-tax contribution account under the Coherent Plan),a separate Coherent Employer Account (which shall consist of the balance of the Coherent Participant�smatching and profit sharing accounts under the Coherent Plan) and a separate Coherent Rollover Account(such separate Accounts of the Coherent Participant sometimes referred to collectively as �CoherentAccounts�). Effective May 19, 2000, for each Salix Participant, there shall also be maintained as appropriate aseparate Salix Before-Tax Account (which shall consist of a balance of the Salix Participant�s pre-taxcontribution account under the Salix Plan), a separate Salix Employer Account (which shall consist of thebalance of the Salix Participant�s matching and profit sharing accounts under the Salix Plan) and a separateSalix Rollover Account (such separate Accounts of the Salix Participant sometimes referred to collectively as�Salix Accounts�). Each Account (including any sub-accounts) shall be credited with the amount ofcontributions, interest and earnings of the Trust Fund allocated to such Account and shall be charged with alldistributions, withdrawals and losses of the Trust Fund allocated to such Account.

b. The post-1986 After-Tax sub-account shall be a �separate contract� for the purposes of Code Section 72(e).

SECTION 5.2 Common Fund.

a. The Trust Fund shall be a common fund divided into separate investment funds (�Funds�) as provided in thisSection 5.2. Each Fund as may from time to time be established shall be a common fund in which eachParticipant shall have an undivided interest in the respective assets of the Fund, provided that all accountssegregated and all loans made to Participants pursuant to the provisions of Section 7.11 (Loans) shall togetherwith any income or expense of such Accounts or loans be accounted for separately and will not be included inany of the adjustments resulting from the application of this Section 5.2. Except as otherwise provided, thevalue of each Participant�s Accounts in such Funds shall be measured by the value of the shares or Units ofsuch Fund credited to his Accounts as of the date that such valuation is being determined. For purposes ofallocation of income and valuation, each Fund shall be considered separately. No Fund shall share in the gainsand losses of any other, and no Fund shall be valued by taking into account any assets or distributions fromany other.

b. Each Fund shall be established and invested by the Trustee in accordance with investment policiesdetermined, or as the Trustee may be directed, from time to time by the Investment Committee. TheInvestment Committee may from time to time also direct that Funds be terminated or that Funds with similarinvestment objectives be consolidated. Subject to the Investment Committee�s authority to consolidate, Fundsshall be maintained for the various types of Accounts as follows:

i. At least one Fund shall be established, maintained and invested with the objective of minimizing theeffect of market fluctuations while producing a rate of return consistent with such objective.

ii. A second Fund shall be established, maintained and invested in common stock of Tellabs, Inc., theCompany�s parent holding company (�Tellabs Stock Fund�).

iii. An additional Fund or Funds shall be established, maintained and invested as the InvestmentCommittee may from time to time direct.

d. Participant investment elections shall be made as follows:



i. Subject to subsection (iii) below, the Investment Committee shall direct the Trustee to invest eachParticipant�s Accounts from time to time among the Funds as the Participant may elect. A Participantmay elect to have a uniform percentage of his Retirement Account, Profit Sharing Account, After-TaxAccount, Matching Account, Before-Tax Account, Rollover Account, effective as of April 1, 1999,each of his Coherent Accounts (excluding the value of any loan credited to any such Account), andeffective as of May 19, 2000, each of his Salix Accounts (excluding the value of any loan credited toany such Account) credited in increments of 1% to one or more of the Funds. All contributions to hisRetirement Account, Profit Sharing Account, After-Tax Account, Before-Tax Account, and RolloverAccount shall be credited to such Funds in accord with such election.

ii. Subject to subsection (iii) and (vi) below and to any restriction on transfer which result from theinvestment medium chosen for a Fund, a Participant may elect to transfer in multiples of 1% auniform percentage of his Retirement Account, Profit Sharing Account, Matching Account, After-TaxAccount, Before-Tax Account, Rollover Account, effective as of April 1, 1999, each of his CoherentAccounts (excluding the value of any loan credited to any such Account), and effective as of May 19,2000, each of his Salix Accounts (excluding the value of any loan credited to any such Account) heldin any Fund to one or more different Funds. Any such election shall not affect any prior electionunder subsection (i) above. Loans made pursuant to Section 7.11 (Loans) shall be treated assegregated investments from the Participant�s applicable Accounts, transferred to and from variousFunds in accord with uniform rules established by the Administrative Committee.

iii. Investment of amounts allocated to a Participant�s Retirement Account and Profit Sharing Accountshall be subject to the restrictions set forth in this subsection (iii). No amount attributable to theRetirement Account of any Participant shall be transferred to the Tellabs Stock Fund pursuant tosubsection (ii) above. Amounts contributed to a Participant�s Profit Sharing Account after 1992 shallbe invested in the Tellabs Stock Fund and no amount attributable thereto shall be transferred by aParticipant from the Tellabs Stock Fund to any other Fund pursuant to subsection (ii) above prior tothe date such Participant attains age 55. No amount attributable to the Profit Sharing Account which istransferred from the Tellabs Stock Fund pursuant to the preceding sentence shall thereafter betransferred to the Tellabs Stock Fund.

iv. Elections under this Section shall be made at such times in accordance with procedures established bythe Administrative Committee. Such elections shall be effective as of the Entry Date following timelyreceipt by the Administrative Committee.

v. To the extent provided in the Trust, or as may be prescribed by the Investment Committee, aParticipant may direct the Trustee with respect to the voting or exercise of any other rights withrespect to the Funds. Any such directions shall be made in the manner set forth in the trust agreementor as prescribed by the Administrative Committee.

vi. Transfer elections to or from the Tellabs Stock Fund (including, for this purpose, liquidation ofamounts held in the Tellabs Stock Fund to fund loans or in-service withdrawals pursuant toSections 7.10 (Distribution of Participants� After-Tax Account and Rollover Account), 7.11 (Loans),7.12 (Withdrawals Prior to Termination of Employment and After Age 59-1/2) or 7.13 (HardshipWithdrawals) below (other than distributions or transactions made in connection with death,disability, retirement or termination of employment)) made by a Participant who is subject to theliability provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the �1934Act�), shall not be effective unless such transfer election is made at least six months following thedate of the most recent transfer election made by such Participant under this Plan, or under any otherplan maintained by the Employer, that effected a �discretionary transaction� within the meaning ofRule 16b-3 promulgated under Section 16 of the 1934 Act that was an �opposite way� transaction.



For this purpose, a transfer into the Tellabs Stock Fund (or similar fund under another plan) is an�opposite way� transaction from a transfer or distribution out of the Tellabs Stock Fund (or similarfund under another plan), and vice versa.

vii. Notwithstanding anything in this Article 5 (Accounting Provisions and Allocations) to the contrary,amounts contributed by the Employers pursuant to Article 14 (Retiree Medical Benefits) shall beallocated, invested and distributed in accordance with the provisions of Article 14 (Retiree MedicalBenefits).

h. Wherever in this Section 5.2 the term �Participant� is used, it shall be deemed to include, where applicable,(i) the beneficiary of a deceased Participant who is entitled to any portion of the deceased Participant�sAccounts, and (ii) an Alternate Payee under a Qualified Domestic Relations Order described in CodeSection 414(p).

i. The Plan is intended to constitute a plan described in ERISA Section 404(c) and Title 29 of FederalRegulations Section 2550.404c-1. To the extent permitted by law, the fiduciary of the Plan shall be relieved ofliability for any losses which are the direct and necessary result of investment instructions given by anyParticipant.

SECTION 5.3 Unit Values.

a. The value of a Unit in each Fund on any Valuation Date shall be the quotient obtained by dividing the sum of(i) the cash and (ii) the fair market value (as determined by the Trustee) of all securities and other propertyheld in such Fund, less any charges and expenses accrued and properly chargeable to such Fund as of saidValuation Date by the aggregate number of Units credited to the Accounts of all Participants with respect tosuch Fund. The Trustee will furnish to the Committees a report with respect to the fair market value of allsecurities and other property held in any Fund as of any Valuation Date. To the extent that any assets of aFund have been invested in one or more separate investment trusts, mutual funds, investment contracts orsimilar investment media, the net earnings or losses attributable to such investments shall be determined inaccordance with the procedures of such investment media.

b. The value of each Unit in a Segregated Loan Account shall be equal to one dollar. The value of any note as ofeach Valuation Date shall be the amount of any outstanding principal.

SECTION 5.4 Eligibility to Share in Employer Contributions and Forfeitures.

a. Under the Retirement Program. An Active Participant shall be eligible to share in the Retirement Contributionand forfeitures for a given quarter of the Plan Year as of the last day of the quarter for which such contributionor forfeitures are being allocated if he is then employed by the Employer as an Eligible Employee. AParticipant who, during such quarter, retires on or after his Normal Retirement Date, dies or is initiallydeemed to be totally and permanently disabled in accordance with the Disability Plan shall also be eligible toshare in the Retirement Contribution and forfeitures for such quarter.

b. Profit Sharing Contribution Under the Savings Program. An Active Participant shall be eligible to share in theProfit Sharing Contribution and forfeitures for a given quarter of the Plan Year as of the last day of the quarterfor which such contribution or forfeitures are being allocated if he is then employed by the Employer as anEligible Employee. An Active Participant who, during a Plan Year, retires on or after his Normal RetirementDate, dies or is initially deemed to be totally and permanently disabled in accordance with the Disability Plan,shall also be eligible to share in the Profit Sharing Contribution and forfeitures for said Plan Year. TheParticipants eligible to share in the Profit Sharing Contribution for a given Plan Year under subsection 3.3(b)above shall be as the Board of Directors shall determine in connection with its determination of the amount ofthe Profit Sharing Contribution to be made under subsection 3.3(b) above.



c. Matching Contribution Under the Savings Program. An Active Participant shall be eligible to share in theMatching Contribution for a given quarter of the Plan Year as of the first pay period of the quarter for whichsuch contribution is being allocated. Eligibility to share in and sharing in the Matching Contribution shall besubject to the conditions and limitations of Sections 3.6 (Matching Contributions Under the Savings Plan) and3.7 (Limitations on Matching Conditions Under the Savings Plan).

d. A Participant eligible to share in the Matching Contribution, the Retirement Contribution and/or ProfitSharing Contribution pursuant to the above subsections (a), (b) and/or (c) shall for purposes of suchparagraphs be known as an �Eligible Participant.�

SECTION 5.5 Allocation of Before-Tax Contributions. The Before-Tax Contributions made on behalf of aParticipant shall be allocated to such Participant�s Before-Tax Account as soon as practicable after the Trustee receivessuch contribution.

SECTION 5.6 Allocation of Matching Contributions. The portion of Matching Contributions made on a bi-weeklypayroll basis shall on behalf of a Participant be allocated to the Matching Account of such Participant as soon aspracticable after the Trustee receives such contribution.

SECTION 5.7 Allocation of After-Tax Contributions. While After-Tax Contributions are not allowed afterJanuary 1, 1994, for those Participants who still have an After-Tax Account then as of each Valuation Date, the earningsand interest on the After-Tax Contributions of a Participant received since the prior Valuation Date shall be allocated tosuch Participant�s After-Tax Account.

SECTION 5.8 Allocation of Retirement Contribution and Forfeitures. As of the last day of a Plan Year, theRetirement Contribution (together with the forfeitures taken into account in determining the Retirement Contributionunder Section 3.2 (Retirement Contribution Under the Retirement Program), shall be allocated among the RetirementAccounts of all Eligible Participants under subsection 5.4(a) in the ratio that the Considered Compensation of each suchParticipant for such Plan Year bears to the Considered Compensation of all such Participants for such Plan Year.

SECTION 5.9 Allocation of Profit Sharing Contribution and Forfeitures. As of the last day of each quarter of a PlanYear, the Profit Sharing Contribution (together with the forfeitures taken into account in determining the Profit SharingContribution under subsection 3.3(a)) above shall be allocated among the Profit Sharing Accounts of all EligibleParticipants under subsection 5.4(b) above in the ratio that the Considered Compensation of each such Participant forsuch quarter bears to the Considered Compensation of all such Participants for such quarter of the Plan Year. As ofthe last day of each Plan Year, the portion of the Profit Sharing Contribution under subsection 3.3(b) above, if any,to be allocated for the Plan Year shall be allocated among the Profit Sharing Accounts of all Eligible Participantsunder subsection 5.4(b) above in the manner prescribed by the Board of Directors with respect to such Profit SharingContribution.

SECTION 5.10 Crediting Accounts.

a. All contributions or Rollover Amounts to the Trust made by or on behalf of a Participant shall be deposited inthe form of cash or other assets acceptable to the Trustee and consistent with the investment Funds thenmaintained, including, but not limited to, securities of Tellabs, Inc. and shall be credited to the appropriateAccounts of such Participant as of the date received by the Trust Fund; provided, however, any contributionsmade with respect to a Plan Year shall be credited to the appropriate Accounts of such Participant as of thelast day of such Plan Year.

b. For each amount allocable to the Accounts of any Participant with respect to any Fund, his Accounts withrespect thereto shall be credited with a number of Units equal to the quotient obtained by dividing suchamount by the value of a Unit, determined as of the applicable Valuation Date.



c. The Administrative Committee shall also establish and maintain an Account with respect to each SegregatedLoan made to a Participant pursuant to Section 7.11 (Loans). The Participant�s Segregated Loan Accountshall be credited with a number of Units determined in accordance with Section 5.3 (Unit Values) and equal tothe value of any notes held by the Account. A number of Units equal to the value of any principal paymentsby the Participant to the Segregated Loan Account shall be promptly charged to the Segregated Loan Accountand transferred along with any interest payments to the separate investment Funds in accordance with theParticipant�s investment election then in effect under Section 5.2 (Common Fund).

SECTION 5.11 Provisional Annual Addition. The sum of the amounts allocated to the Accounts of eachParticipant pursuant to Sections 5.5 (Allocation of Before-Tax Contributions), 5.6 (Allocation of MatchingContributions), 5.7 (Allocation of After-Tax Contributions), 5.8 (Allocation of Retirement Contribution and Forfeitures)and 5.9 (Allocation of Profit Sharing Contribution and Forfeitures) for a Plan Year shall be known as the �ProvisionalAnnual Addition� and shall be subject to the limitation on Annual Additions in Section 5.12 (Limitation on AnnualAdditions).

SECTION 5.12 Limitation on Annual Additions.

a. For the purpose of complying with the restrictions on Annual Additions to defined contribution plans imposedby Code Section 415, for each Active Participant during the Plan Year, there shall be computed a MaximumAnnual Addition, which:

i. for Plan Years effective prior to January 1, 2002, shall be the lesser of:

A. 25% of his Total Compensation for the Plan Year; or

B. the Defined Contribution Dollar Limitation for the Plan Year.

iii. for Plan Years effective on or after January 1, 2002, except as permitted under subsection 3.5(a)(ii)above and Code Section 414(v), if applicable, shall be the lesser of:

A. 100% of his Total Compensation for the Plan Year; or

B. the Defined Contribution Dollar Limitation for the Plan Year.

The compensation limit referred to in subsection (A) above shall not apply to any contribution for medicalbenefits after separation from service (within the meaning of Code Section 401(h) or Code Section 419A(f)(2))which is otherwise treated as an Annual Addition.

If a short Limitation Year is created because of an amendment changing the Limitation Year to a different12 consecutive month period, the Maximum Annual Addition will not exceed the Defined Contribution DollarLimitation multiplied by the following fraction:

Number of months in the short Limitation Year

12

The limitation under subsection (a) above shall not apply to any contribution for medical benefits within themeaning of Code Section 419A(f)(2) after separation from service which is otherwise treated as an AnnualAddition, or any amount otherwise treated as an Annual Addition under Code Section 415(l)(2).



b. If the Maximum Annual Addition for a Participant equals or exceeds the Provisional Annual Addition for thatParticipant, an amount equal to the Provisional Annual Addition shall be allocated to the Participant�srespective Accounts.

c. If the Provisional Annual Addition exceeds the Maximum Annual Addition for that Participant, theProvisional Annual Addition shall be reduced as set forth below until the Provisional Annual Addition as soreduced equals the Maximum Annual Addition for such Participant:

i. first, the Tentative Employer Contribution allocable to such Participant�s respective Accounts shallbe reduced by reducing (A) the Supplemental Before-Tax Contributions, and (B) the Basic Before-Tax Contributions and Matching Contributions, proportionately, in that order;

ii. second, the Tentative Employer Contribution allocable to such Participant�s respective Accounts shallbe reduced by reducing the Profit Sharing Contribution; and

iii. third, the Tentative Employer Contribution allocable to such Participant�s respective Accounts shallbe reduced by reducing the Retirement Contribution.

The Provisional Annual Addition remaining after such reductions shall be allocated to the Participant�srespective Accounts.

d. Any forfeiture which cannot be allocated under the Plan because of the application of the above limit shall becarried in the Excess Forfeiture Suspense Account for such Plan Year. In the next succeeding Plan Year theamounts included in such Account shall be treated as a forfeiture for such Plan Year and shall be used toreduce Employer Contributions (as defined in Section 3.1 (Employer Contributions)) for such plan year.Amounts which are included in the Excess Forfeiture Suspense Account as of the end of a Plan Year shall betreated as a liability of the Trust Fund. Upon termination of the Plan, amounts then held in the ExcessForfeiture Suspense Account which cannot be allocated pursuant to this Section shall revert to the Employer.

e. The Excess Tentative Employer Contribution is an amount equal to the sum of the reductions in the TentativeEmployer Contribution allocable to the Accounts of Participants pursuant to subsection (b) above.

f. Contributions made under Section 2.5 (Qualified Military Service) shall be treated as Annual Additions for thePlan Year to which they relate instead of the Plan Year when they are actually made.

ARTICLE 6

Amount of Payments to Participants

SECTION 6.1 General Rule. Upon the retirement, disability, resignation or dismissal of a Participant, he, or inthe event of his death, his beneficiary, shall be entitled to receive from his respective Accounts in the Trust Fund:

a. an amount equal to the value of the Units credited to the Participant�s Profit Sharing Account attributable topre-1993 contributions, Before-Tax Account, Matching Account, After-Tax Account, Rollover Account,Coherent Before-Tax Account, Coherent Rollover Account, Salix Before-Tax Account, Salix EmployerAccount and Salix Rollover Account, plus any of the Participant�s Before-Tax Contributions and After-TaxContributions made to the Trust Fund but not included in the Participant�s Units as of such Valuation Date;and



b. an amount equal to the value of the Units credited to the nonforfeitable portion of the Participant�s RetirementAccount, Post-1992 Profit Sharing Account and Coherent Employer Account determined as hereafter setforth.

The time and manner of distribution of a Participant�s Accounts shall be determined in accordance with Article 7(Distributions).

SECTION 6.2 Normal Retirement. Any Participant may retire on or after his Normal Retirement Date, at whichdate the forfeitable portion, if any, of his Retirement Account and Post-1992 Profit Sharing Account shall becomenonforfeitable. If the retirement of a Participant is deferred beyond his Normal Retirement Date, he shall continue infull participation in the Plan and Trust Fund.

SECTION 6.3 Death. As of the date any Participant dies while employed by the Employer or an Affiliate,the forfeitable portion, if any, of his Retirement Account and Post-1992 Profit Sharing Account shall becomenonforfeitable.

SECTION 6.4 Disability. As of the date any Participant shall be determined by the Administrative Committee tohave become totally and permanently disabled because of physical or mental infirmity in accordance with the DisabilityPlan while in the employ of the Employer or an Affiliate and his employment shall have terminated, the forfeitableportion, if any, of his Retirement Account and Post-1992 Profit Sharing Account shall become nonforfeitable.

SECTION 6.5 Vesting. A Participant�s interest in his Accounts, other than his Retirement Account and Post-1992Profit Sharing Account (and Coherent Employer Account in accordance with Section 6.6 (Resignation or Dismissal),shall be nonforfeitable at all times. A Participant who has completed five (5) or more Years of Service shall have anonforfeitable interest in his Retirement Account, and his Post-1992 Profit Sharing Account.

SECTION 6.6 Resignation or Dismissal. If any Participant shall incur a Termination Date, prior to the date hisRetirement Account and Post-1992 Profit Sharing Account shall become nonforfeitable in accordance with Section 6.5(Vesting), other than in circumstances described in Section 6.2 (Normal Retirement), 6.3 (Death) or 6.4 (Disability),then the Retirement Account and Post-1992 Profit Sharing Account of such Participant shall be treated as a forfeiturepursuant to Section 6.7 (Treatment of Forfeitures). The Coherent Employer Account of any Coherent Participant whoshall have incurred a Termination Date prior to April 1, 1999 and who incurred a forfeiture because such Account wasnot 100% nonforfeitable as of such Termination Date shall be treated as a forfeiture pursuant to Section 6.7 (Treatmentof Forfeitures) as if the Coherent Participant�s termination of employment occurred on April 1, 1999.

SECTION 6.7 Treatment of Forfeitures.

a. Upon termination of a Participant�s employment with the Company and all Affiliates, if his RetirementAccount and Post-1992 Profit Sharing Account become a forfeiture pursuant to Section 6.6 (Resignation orDismissal), each Account shall become allocable pursuant to Sections 5.8 (Allocation of RetirementContribution and Forfeitures) and 5.9 (Allocation of Profit Sharing Contribution and Forfeitures), asapplicable, at the end of the last day of the quarter of the Plan Year in which the termination of employmentoccurred if the Participant is not then reemployed by the Employer or an Affiliate. Any Coherent EmployerAccount treated as a forfeiture on April 1, 1999 pursuant to Section 6.6 (Resignation or Dismissal) shall beallocable pursuant to Section 5.9 (Allocation of Profit Sharing Contribution and Forfeitures) as of June 30,1999.

b. If the Participant is reemployed by the Employer or an Affiliate without incurring a Period of Severance offive consecutive years, the amount of the forfeitures shall be restored to his Retirement Account, ProfitSharing Account and Coherent Employer Account as of the last day of the quarter of the Plan Year in whichhe is reemployed and shall be deducted from the forfeitures which otherwise would be allocable as of such



date or, to the extent such forfeitures are insufficient, shall require a supplemental contribution from theEmployer.

ARTICLE 7

Distributions

SECTION 7.1 Commencement and Form of Distributions.

a. Except as otherwise provided in subsection (g) below a Participant (and, when applicable for distributionsfrom the Retirement Account, the Participant�s spouse) must consent, in writing to any distribution of theParticipant�s Accounts in the Trust Fund. Distribution of a Participant�s Accounts in the Trust Fund shallcommence not later than the first to occur of:

i. the 60th day after the close of the later of the Plan Year in which the Participant attains his NormalRetirement Date or terminates employment with the Company and all Affiliates, unless the Participanthas requested to defer the distribution to a later date; or

ii. on or as soon as practicable after the date set forth in the Participant�s request for distribution,provided the Administrative Committee informs the Participant, as outlined in subsection 7.1(i)below, that the Participant has a right for a period of at least 30 days after receiving the notice toconsider the decision of whether or not to elect a distribution (and a particular distribution option).

c. A Participant who continues employment after his Normal Retirement Date may elect to receive distributionof his Accounts in the manner described in subsection (a)(i) above. A Participant employed by an Employerafter his Normal Retirement Date will be deemed to have requested a deferral, unless he specifically requests adistribution.

d. In all events, distribution shall commence no later than the Required Beginning Date, and subsequentdistributions required to be made each year for compliance with Code Section 401(a)(9) and the regulationspromulgated thereunder shall be made no later than December 31 of such year. However, in the event that adomestic relations order is received by the Administrative Committee, required distributions on or after therequired beginning date may be postponed until the order is determined to be qualified or not pursuant toSection 12.3 (Qualified Domestic Relations Order).

e. Form of Distribution for Accounts other than the Retirement Account:

i. Effective for distributions made on or after February 1, 2002, the Accounts distributable to aParticipant, other than the Retirement Account, shall be distributed in one or more of the followingways, as the Participant may request by filing such notice as shall be prescribed by the AdministrativeCommittee, and in accordance with applicable laws and regulations:

A. by payment in a single sum; or

B. by a direct rollover to an employee�s trust in which he is a participant, which is described inCode Section 401(a) and which is exempt from tax under Code Section 501(a), or to anindividual retirement arrangement described in Code Section 408, in accordance withSection 7.14 (Eligible Rollover Distributions).



iii. Effective for distributions prior to February 1, 2002, the Accounts distributable to a Participant, otherthan the Retirement Account, shall be distributed in one or more of the following ways, as theParticipant may request by filing such notice as shall be prescribed by the Administrative Committee,and in accordance with applicable laws and regulations:

A. by payment in a single sum;

B. in substantially equal monthly, quarterly, semi-annual or annual installments which, exceptfor the final payment, shall not be less than $100; or

C. by a direct rollover to an employee�s trust in which he is a participant, which is described inCode Section 401(a) and which is exempt from tax under Code Section 501(a), or to anindividual retirement arrangement described in Code Section 408, in accordance withSection 7.14 (Eligible Rollover Distributions).

b. The Retirement Account distributable to a Participant shall be distributed pursuant to Section 7.2 (QualifiedJoint and Survivor Annuity) and 7.3 (Pre-Retirement Survivor Annuity � Retirement Account, Salix Accountsand Coherent Accounts) of this Article, unless the Qualified Joint and Survivor Annuity or Survivor Annuityform of distribution are waived and such Account is distributed pursuant to the Participant�s or SurvivingSpouse�s election under subsection 7.1(d) above.

c. The value of the Participant�s Accounts shall be paid to the Participant over a period not to exceed his lifeexpectancy or the joint life expectancy of the Participant and his Individual Beneficiary. The minimumamount of any installment distribution and determination of the life expectancy of a Participant and the jointlife expectancy of a Participant and his Individual Beneficiary shall be determined in accordance with theregulations prescribed under Code Section 401(a)(9); provided that the life expectancy of a Participant or hisspouse shall be re-determined annually.

i. In no event shall the amount distributable in any year be less than the amount determined inaccordance with the minimum distribution incidental benefit requirements of Treasury RegulationSection 1.401(a)(9)-2.

ii. However, with respect to all distributions under the Plan made for calendar years beginning on orafter January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section401(a)(9) in accordance with the regulations under Code Section 401(a)(9) that were proposed onJanuary 17, 2001, notwithstanding any provision of the Plan to the contrary. This amendment shallcontinue in effect until the end of the last calendar year beginning before the effective date of finalregulations under Code Section 401(a)(9) or such other date as may be specified in guidancepublished by the Internal Revenue Service.

c. Notwithstanding anything in this Section 7.1 to the contrary, if the present value of the nonforfeitable portionof the Participant�s Retirement Account, or if the vested balance of the Participant�s remaining Accounts doesnot exceed $3,500 at the time a distribution is to be made from the Plan (or at the time of any priordistributions did not exceed $3,500) and distribution pursuant to this Section 7.1 has not otherwisecommenced, the Administrative Committee shall direct the Trustee to distribute such amount in a single sumpayment to the individual so entitled and the payment thereof shall be in full satisfaction of any liability of theTrust to such individual. Any Participant whose vested balance of his Employer Account is 0% shall bedeemed to have received a single sum payment upon termination of employment. Effective with the 1998 PlanYear, $5,000 shall be substituted wherever $3,500 appears in this subsection (g). Effective for distributionsmade on or after March 22, 1999, the $5,000 cash out amount shall apply at the time a distribution is made,regardless of whether the Participant�s vested Account balances exceeded $5,000 at the time of any priordistribution. Effective for distributions made after December 31, 2001, the present value of a Participant�s



nonforfeitable accrued benefit may be determined without regard to the portion of the benefit that isattributable to Rollover Contributions (and any earnings allocable to the rollover contributions). RolloverContributions are defined as any rollover contribution under Code Sections 402(c), 403(a)(4), 403(b)(8),438(d)(3)(A)(ii) and 457(e)(16).

d. Notwithstanding anything in this Section 7.1 to the contrary, if the amount of any distribution required tocommence on a certain date cannot be ascertained by such date, a payment retroactive to such date may bemade no later than 60 days after the earliest date on which such amount can be ascertained.

e. The Administrative Committee shall furnish each Participant who has a vested interest in a RetirementAccount a general written explanation, in a manner that would satisfy the notice requirements ofSections 1.411(a)-11(c) and 1.417(e)-1(b) of the income tax regulations, of the terms and conditions of theQualified Joint and Survivor Annuity, the Participant�s right to make and the effect of an election to waive it,the rights of the Participant�s spouse, the Participant�s right to revoke an election to waive the Qualified Jointand Survivor Annuity and the effect of such a revocation. This general explanation shall be furnished to aParticipant within 90 days before the Participant�s Annuity Starting Date.

i. General written explanations under this subsection 7.1(i) shall satisfy the following requirements:

A. the Committee informs the Participant that the Participant has a right for a period of at least30 days after receiving the general explanation to consider the decision of whether to waivethe Qualified Joint and Survivor Annuity and consent to another form of distribution,

B. the Participant may revoke an election to waive the Qualified Joint and Survivor Annuityuntil the later of his Annuity Starting Date or the seventh day following the date the generalexplanation is provided to the Participant,

C. the Participant�s Annuity Starting Date is after the date that the general explanation is givento the Participant, and

D. the Participant, after receiving the general explanation, affirmatively elects a form ofdistribution (with appropriate spousal consent as provided in subsection 7.2(c) below), andthe actual distribution begins more than seven days after the date the general explanation isprovided to the Participant;

v. However, notwithstanding the foregoing, a Participant may elect an Annuity Starting Date that isbefore the date on which the general explanation is provided to the Participant if the followingconditions are met:

A. the actual distribution begins more than seven days after the date the general explanation isprovided to the Participant; and

B. the Plan makes retroactive payments to make up for any payments that would have beenmade since the Annuity Starting Date.

SECTION 7.2 Qualified Joint and Survivor Annuity � Retirement Account, Salix Accounts and CoherentAccounts.

a. Distributions from a Participant�s Retirement Account and prior to February 1, 2002, his Coherent Accountsshall be made in the form of a Qualified Joint and Survivor Annuity unless the Participant has elected not toreceive a Qualified Joint and Survivor Annuity pursuant to subsection (c) below. Prior to February 1, 2002,distributions from a Participant�s Salix Accounts may be made in the form of a Qualified Joint and Survivor



Annuity if the Participant makes a written election requesting such form of distribution to the AdministrativeCommittee. Distributions from a Participant�s Coherent Accounts or his Salix Accounts made on or afterFebruary 1, 2002, will only be offered in the form of a lump sum distribution.

b. Benefits payable in the form of a Qualified Joint and Survivor Annuity shall be paid by distributing to theParticipant an annuity contract purchased by the Trustee at the direction of the Administrative Committee withthe nonforfeitable balance of the Participant�s Retirement Account, Salix Accounts and Coherent Accountsdetermined on the Valuation Date preceding the date of purchase. Any such annuity contract shall benonassignable and noncommutable and shall be subject to the election, consent, written explanation andSurvivor Annuity requirements of this Article 7 (Distributions). Delivery of such contract shall be in fullsatisfaction of the rights of the Participant hereunder with respect to such Account, and upon delivery of anysuch contract, the Participant shall not have any interest in the Trust Fund but shall look solely to the insurerissuing such contract for the payment of benefits.

c. Elections and revocations of a Qualified Joint and Survivor Annuity shall be made as follows:

i. A Participant may, within 90 days before his Annuity Starting Date elect not to receive a QualifiedJoint and Survivor Annuity and, in lieu thereof, elect to receive distribution of such Account in thesame time and manner as distribution of his other Accounts. Such elections may be revoked andelections and revocations made at a time after the general explanation in subsection 7.1(a)(ii) abovehas been provided, and if so revoked the Participant�s benefit shall automatically be paid in the formof a Qualified Joint and Survivor Annuity unless he has elected another form of payment pursuant tosubsection 7.1(d) above.

ii. If a Participant is married on his Annuity Starting Date, to be effective, any elections hereunder andunder subsection 7.3(e) or 7.7(b) below must have the consent of the Participant�s spouse unless theParticipant establishes to the satisfaction of the Administrative Committee that the consent of thespouse cannot be obtained because there is no spouse, such spouse cannot be located or by reason ofsuch other circumstances as may be prescribed by regulations. Any consent (or establishment that theconsent cannot be obtained) shall be effective only with respect to such spouse. Such consent shall bein writing, witnessed by a Plan representative or notary public, acknowledging the effect of theelection and any nonspouse beneficiary, including any class of beneficiary or any contingentbeneficiary, designated under the form of benefit elected, and shall be irrevocable with respect to suchform and beneficiary designation.

iii. Notwithstanding the above, the consent of a Participant�s spouse to the waiver of a Qualified Jointand Survivor Annuity shall not be required if the Participant was not married throughout the one-yearperiod ending on his Annuity Starting Date. A Participant who marries within one year before hisAnnuity Starting Date and is married to such spouse for a one-year period ending prior to his deathshall be deemed to have been married throughout the one-year period ending on his Annuity StartingDate.

d. If the spouse of a Participant dies, or is divorced from the Participant before the Participant�s Annuity StartingDate, the Participant�s retirement benefit shall not be reduced in accordance with this Section. If aParticipant�s spouse dies or is divorced from the Participant on or after the Participant�s Annuity StartingDate, but prior to the death of the Participant, the Qualified Joint and Survivor Annuity shall continue to bepaid in the same reduced amount determined under this Section.

e. If the Participant dies before his Annuity Starting Date, no annuity shall be payable to his spouse pursuant tothis Section and the benefit payable to such spouse, if any, shall be determined under Sections 7.3 (Pre-Retirement Survivor Annuity � Retirement Account, Salix Accounts and Coherent Accounts), 7.4



(Distributions to Beneficiaries) or 7.6 (Installment or Deferred Distributions). If the Participant dies after hisAnnuity Starting Date and while receiving benefits in the form of a Qualified Joint and Survivor Annuity, thespouse to whom the Participant was married on his Annuity Starting Date shall, except as may be otherwiseprovided in any Qualified Domestic Relations Order, be entitled to receive the survivor annuity benefitwhether or not the Participant and such spouse are married on the date of the Participant�s death.

SECTION 7.3 Pre-Retirement Survivor Annuity � Retirement Account, Salix Accounts and Coherent Accounts

a. The Retirement Account and prior to February 1, 2002, the Coherent Accounts and Salix Accounts in theTrust Fund distributable to a Participant who dies prior to his Annuity Starting Date and who is married on thedate of his death shall be distributed in the form of an annuity for the life of his surviving spouse (�Pre-Retirement Survivor Annuity�) unless such Participant has elected not to have benefits paid in the form of aPre-Retirement Survivor Annuity pursuant to subsection (e) below or the surviving spouse elects otherwisepursuant to subsection (d) below. For distributions made from a Participant�s Coherent Accounts or his SalixAccounts on or after February 1, 2002, only a lump sum distribution will be offered.

b. Benefits payable in the form of a Pre-Retirement Survivor Annuity shall be paid by distributing to thesurviving spouse of the Participant an annuity contract purchased by the Administrative Committee with thenonforfeitable balance of the Participant�s Retirement Account, Salix Accounts and Coherent Accounts on theValuation Date preceding the date of purchase. Such annuity contract shall provide for level monthlypayments for the life of the surviving spouse of the Participant commencing as soon as practicable thereafter.Any such annuity contract shall be nonassignable and noncommutable. Delivery of any such contract shall bein full satisfaction of the rights of the Participant�s spouse.

c. Payment of the Pre-Retirement Survivor Annuity shall commence as of the first day of the month coincidingwith or next following the latest of:

i. the date the Participant dies; or

ii. the date the Participant�s surviving spouse elects, but not later than the Participant�s NormalRetirement Date.

c. Notwithstanding subsection (b) above, the surviving spouse of a Participant may elect to receive a distributionof the balance of the deceased Participant�s Retirement Account, Salix Accounts and Coherent Accounts in asingle sum by filing an election with the Administrative Committee at such time and in such manner as theAdministrative Committee shall provide.

d. A Participant may elect not to have a Pre-Retirement Survivor Annuity paid to his surviving spouse. Suchelection may be made at any time during the Election Period described in subsection (f) below. In addition, aParticipant may elect to waive the Pre-Retirement Survivor Annuity prior to the Election Period, provided hehas been given the information described in subsection (g) below prior to making such election, and furtherprovided that such election shall become invalid as of the first day of the Plan Year in which the Participantattains age 35. To be effective, any such election shall require the consent of the Participant�s spouse asprovided in subsection 7.2(c). Any such election may be revoked by the Participant within the Election Period.

e. The Election Period shall commence on the first day of the Plan Year in which the Participant attains age 35and end on the earlier of:

i. the date of the Participant�s death, or

ii. his Annuity Starting Date.



provided that, in the case of a Participant who separates from service prior to attaining age 35 and who hasa nonforfeitable right to any portion of his Accounts, the Election Period shall commence on the date of hisseparation from service with respect to his Accounts as of such date.

c. The Administrative Committee shall furnish each Participant a general written explanation of the terms andconditions of the Pre-Retirement Survivor Annuity, the Participant�s right to make and the effect of anelection to waive it, the rights of the Participant�s spouse, the Participant�s right to revoke an election towaive the Pre-Retirement Survivor Annuity and the effect of such revocation. Such information shall beprovided within the period beginning on the first day of the Plan Year in which the Participant attains age 32,and ending with the last day of the Plan Year preceding the Plan Year in which the Participant attains age 35,provided however, that:

i. If an individual becomes a Participant after attaining age 32, the information described above shall beprovided no later than the close of the second Plan Year following the date he became a Participant;and

ii. If a Participant separates from service prior to attaining age 35 and has a nonforfeitable right to anyportion of his Retirement Account, Salix Accounts and Coherent Accounts, the information describedabove shall be provided to him/her no later than one year after his separation from service.

SECTION 7.4 Distributions to Beneficiaries

a. Except as otherwise provided in this Section 7.4, the balance of a deceased Participant�s Accounts other thanthe Retirement Account and prior to February 1, 2002, his Salix Accounts and Coherent Accounts which aredistributable to a beneficiary shall be distributed in one or more of the forms described in subsection 7.1(d)(i)or 7.1(d)(ii) above, in accordance with an effective designation filed by the Participant with theAdministrative Committee or, if no such designation has been filed, in one of such forms as the beneficiariesshall request.

b. If the distribution of the Participant�s Accounts has begun in accordance with Section 7.1 (Commencementand Form of Distribution), any form of distribution to a beneficiary under this Section 7.4 shall be designed todistribute the balance of the deceased Participant�s Accounts at least as rapidly as under the method ofdistribution in effect at the time of the Participant�s death.

c. If the distribution of a Participant�s Accounts has not commenced at the time of his death, any form ofdistribution to a beneficiary shall be designed to distribute the balance of the deceased Participant�s Accountsas follows:

i. Any portion of the Accounts payable to or for the benefit of an Individual Beneficiary may bedistributed over a period not to exceed the life expectancy of such Individual Beneficiary if suchpayments commence not later than the December 31 coinciding with or next following the firstanniversary of the Participant�s death, unless such Individual Beneficiary is the surviving spouse ofthe Participant, in which case such payments need not commence until the later of:

A. the December 31 coinciding with or next following the first anniversary of the Participant�sdeath, or

B. the December 31 of the calendar year in which the Participant would have attained age 70-1/2.



iii. If the Participant�s surviving spouse is an Individual Beneficiary and dies prior to the commencementof benefit payments to such spouse, subsection (i) above shall be applied as if the Participant�s deathhad occurred on the date of such spouse�s death.

iv. Unless distribution is made in accordance with subsection (i) or (ii) above, the balance of theParticipant�s Accounts shall be distributed in full no later than the December 31 coinciding with ornext following the 5th anniversary of the Participant�s death.

b. If a beneficiary to whom payments have commenced dies prior to receipt of all such payments, the remainingbalance of the Participant�s Accounts shall be distributed as described in subsection 7.5(d) at least as rapidlyas under the method of distribution in effect at the time of the beneficiary�s death.

c. The life expectancy of an Individual Beneficiary who is the surviving spouse of the Participant shall be re-determined annually in accordance with regulations prescribed under Code Section 401(a)(9).

SECTION 7.5 Beneficiary Designations.

a. Unless a Participant has effectively elected otherwise in accordance with this Section 7.5, the distributablebalance of a deceased Participant�s Accounts shall be paid to his surviving spouse.

b. The distributable balance of a deceased Participant�s Accounts shall be distributed to the persons effectivelydesignated by the Participant as his beneficiaries. To be effective, the designation shall be filed with theAdministrative Committee in such written form as the Administrative Committee requires and may includecontingent or successive beneficiaries; provided that any designation by a Participant who is married at thetime of his death or, if earlier, the date his benefit payments commence, which fails to name his survivingspouse as the sole primary beneficiary shall not be effective unless such surviving spouse has consented to thedesignation in writing, witnessed by a Plan representative or notary public, acknowledging the effect of thedesignation and the specific non-spouse beneficiary, including any class of beneficiaries or any contingentbeneficiary. Such consent shall be irrevocable with respect to such beneficiary designation. Such consent shallnot be required if the Participant establishes to the satisfaction of the Administrative Committee that theconsent of the Participant�s spouse cannot be obtained because there is no spouse, such spouse cannot belocated or by reason of such other circumstances as may be prescribed by regulations. Any consent (orestablishment that the consent cannot be obtained) shall be effective only with respect to such spouse. AnyParticipant may change his beneficiary designation at any time by filing with the Administrative Committee anew beneficiary designation (with such spousal consent as may be required). Notwithstanding the foregoing,designation of a beneficiary by a Participant who did not have an Hour of Service after August 22, 1984, shallnot require the consent of his surviving spouse to be effective.

c. If a Participant dies, and to the knowledge of the Administrative Committee after reasonable inquiry leaves nosurviving spouse, has not filed an effective beneficiary designation or has revoked all such designations, orhas filed an effective designation but the beneficiary or beneficiaries predeceased him, the distributableportion of the Participant�s Accounts shall be paid to the executor or administrator of the Participant�s estate.

d. If the beneficiary, having survived the Participant, dies prior to the final and complete distribution of theParticipant�s Accounts, then the distributable portion of said Accounts shall be paid:

i. to the beneficiary named in the most recent effective beneficiary designation filed by the Participant�soriginal beneficiary in accordance with such designation; or

ii. if no such beneficiary has been named, to the executor or administrator of the beneficiary�s estate.



SECTION 7.6 Installment or Deferred Distributions. If distribution is made to a Participant or to the beneficiaryof a deceased Participant in installments or is deferred, the undistributed vested balance shall share in the net earningsor losses (including the net adjustments in the value of the Trust Fund) as provided in Section 5.3 (Unit Values) andsuch Participant or beneficiary shall be entitled to make elections with respect to the transfer of such balance among theinvestment Funds in accordance with Section 5.2 (Common Fund).

SECTION 7.7 Form of Elections and Applications for Benefits. Any election, revocation of an election orapplication for benefits pursuant to the Plan shall not be effective unless it is:

a. made on such form, if any, as the Administrative Committee may prescribe for such purpose;

b. signed by the Participant and, if required by subsection 7.2(c) above or Section 7.5 (BeneficiaryDesignations), by the Participant�s spouse; and

c. filed with the Administrative Committee.

SECTION 7.8 Unclaimed Distributions. In the event any distribution cannot be made because the person entitledthereto cannot be located and the distribution remains unclaimed for 2 years after the distribution date established by theAdministrative Committee, then such amount shall be treated as a forfeiture as of the last day of the Plan Year in whichsuch 2-year period ended, shall reduce the Retirement Contribution and Profit Sharing Contribution of such person�sEmployer for said Plan Year, and shall be allocated as part of such Contributions to the Trust Fund in accordancewith Section 5.8 (Allocation of Retirement Contribution and Forefeitures). In the event such person subsequently filesa valid claim for such amount, such amount treated as a forfeiture (without any earnings thereon) shall be restored tothe Participant�s Accounts by an additional Employer Contribution (as defined in Section 3.1 (Employer Contribution))allocable to such Accounts.

SECTION 7.9 Distributions in Kind. The Administrative Committee shall, upon request of a Participant orbeneficiary, distribute amounts from the Fund invested in common stock of the Company in shares of such stock,provided that cash in lieu of any fractional shares shall be distributed. In the event any distributions to a Participant orbeneficiary are made in kind, the assets so distributed shall be valued at their fair market value as of the distributiondate established by the Administrative Committee.

SECTION 7.10 Distribution of Participant�s After-Tax Account, Rollover Account, Salix Rollover Account andCoherent Rollover Accounts Prior to Termination of Employment. A Participant, with the written consent of hisspouse if applicable, may direct the Administrative Committee to make the following payments:

a. An amount equal to the balance in the Participant�s After-Tax Account as determined on the Valuation Datecoinciding with or immediately preceding such direction (less any distribution made to the Participant fromthe Valuation Date to the date of payment).

b. An amount not to exceed his After-Tax Account on the Valuation Date coinciding with or immediatelypreceding such action provided the Participant limits such payments to one withdrawal for each Plan Year.

c. An amount not to exceed the balance in the Participant�s Rollover Contribution Account, Salix RolloverAccount and Coherent Rollover Account, provided that no such distribution shall reduce the Participant�sAccounts to an amount equal to the amount of any unpaid loan made pursuant to Section 7.11 (Loans).

d. Notwithstanding the foregoing:

i. No distribution pursuant to this Section 7.10 shall be made which reduces the aggregate balance of theParticipant�s Accounts below the amount of the unpaid balance of any loan pursuant to Section 7.11(Loans); and



ii. Only one distribution from a Participant�s Rollover Account pursuant to this Section 7.10 shall bepermitted for each Plan Year; and

iii. No more than an aggregate of two distributions from a Coherent Participant�s Coherent RolloverAccount under this Section 7.10 and from any Coherent Account under Sections 7.12 (WithdrawalsPrior to Termination of Employment and After Age 59-1/2) and 7.13 (Pre-59-1/2 Coherent AccountWithdrawals; Hardship Withdrawals) shall be permitted for each Plan Year. This subsection (iii) shallexpire December 31, 2001.

d. Distributions pursuant to this Section 7.10 shall be made from the respective Account invested in the separateFunds. The amounts distributed from such separate Funds shall be determined pursuant to proceduresestablished by the Administrative Committee and subject to the limitations or restrictions thereon imposed bythe sponsor(s) of the respective Fund.

e. Any distribution of a Participant�s After-Tax Account shall be deemed to be made in the following order:

i. contributions allocated to the pre-1987 After-Tax sub-account then earnings on the pre-1987 After-Tax sub-account;

ii. contributions allocated to the post-1986 After-Tax sub-account then earnings on the post-1986 After-Tax sub-account.

c. Withdrawals made pursuant to this Section 7.10 from a Coherent Participant�s Coherent Rollover Account ora Salix Participant�s Salix Rollover Account shall be subject to the provisions of Section 7.2 (Qualified Jointand Survivor Annuity - Retirement Account, Salix Accounts and Coherent Accounts.)

d. Any distribution from a Participant�s Rollover Account, Salix Rollover Account and Coherent RolloverAccount shall be deemed to be made first from the Rollover Account and then from the Salix RolloverAccount or Coherent Rollover Account.

SECTION 7.11 Loans.

a. Upon the submission by the Participant of a written loan application form as prescribed by the AdministrativeCommittee, or any other process approved by the Administrative Committee, a Participant shall be able toobtain a loan from his Accounts other than the Retirement Account and his Profit Sharing Account attributableto post-1992 Profit Sharing Contributions; provided, however, that if the Administrative Committeereasonably believes that the Participant either does not intend to repay the loan or lacks proper financial abilityto repay the loan, it shall not grant such a loan. A Participant shall have no more than three loans outstandingat any time.

b. Loans shall be an asset of the Participant�s Accounts and shall be treated in the manner of a segregatedaccount.

c. The amount of any loan shall not be less than $1,000 and shall not exceed 50% of the amount which theParticipant would be entitled to receive from his Accounts other than his Retirement Account and his ProfitSharing Account attributable to post-1992 Profit Sharing Contributions, if he had resigned from the service ofthe Employer and all Affiliates on the Valuation Date immediately preceding the date of such authorization;provided, however, that the Administrative Committee may, in its sole discretion, approve a loan in an amountless than $1,000 in the event that a Participant demonstrates financial hardship; provided further, however,that the amount of such loan shall not exceed $50,000 reduced by the greater of:



i. the highest outstanding balance of loans to the Participant from the Trust Fund during the one-yearperiod ending on the day before the date on which such loan is made or modified; or

ii. the outstanding balance of loans to the Participant from the Trust Fund on the date on which such loanis made or modified.

c. Such loans shall be made available on a reasonably equivalent basis to all Participants and beneficiaries whohave vested Account balances in the Plan and who either:

i. are active employees; or

ii. are determined by the Administrative Committee to be �parties in interest� as that term is defined inERISA Section 3(14), so long as the making of such loans does not discriminate in favor of HighlyCompensated Employees.

c. Loans shall be made on such terms as the Administrative Committee may prescribe, provided that any suchloan shall be evidenced by a note, shall bear interest on the unpaid balance thereof at a reasonable rate perannum to be set from time to time by the Administrative Committee which is commensurate with the interestrates charged by persons in the business of lending money for loans which would be made under similarcircumstances, shall bear the loan processing fee as the Administrative Committee shall from time to timeapprove and shall be secured by the Participant�s segregated loan account and such other security as theAdministrative Committee in its discretion deems appropriate.

d. Repayment:

i. Loans shall be repaid by the Participant by payroll deduction or any other method approved by theAdministrative Committee that requires level amortization of principal and the loan fee (whichamounts shall be applied to defray the administrative expenses of the Plan) and repayments not lessfrequently than quarterly. Such loans shall be repaid over a period not to exceed 5 years or areasonable amount of time as established by the Administrative Committee, not to exceed 15 years,for loans used to acquire a dwelling unit which within a reasonable time is to be used as the principalresidence of the Participant as determined under the applicable Code provisions in accordance withprocedures established by the Administrative Committee from time to time. The loan shall beamortized in substantially equal payments over the term of the loan.

ii. Loan repayments may, however, be suspended during a leave of absence of up to one year if aParticipant�s pay from the Employer is insufficient to service the debt, but only if the loan is repaidby the latest date permitted under Code Section 72(p)(2)(B) (which is usually 5 years). The loan willnot be considered in default as provided below during this one year period.

iii. Loan repayments may, as determined by the Administrative Committee, be suspended under this Planas permitted under Code Section 414(u) during periods of Qualified Military Service.

d. If, at the time benefits are to be distributed (or to commence being distributed) to a Participant with respect toa separation from service or the death of the Participant, there remains any unpaid balance of a loan hereunder,such unpaid balance shall, to the extent consistent with Department of Labor Regulations, becomeimmediately due and payable in full. Such unpaid balance, together with any accrued but unpaid interest onthe loan, shall be deducted from the Participant�s Accounts, subject to the default provisions below, beforeany distribution of benefits is made, unless the Participant pays back the loan in full. No loan shall be made orremain outstanding with respect to a Participant under this Section 7.11 after the time distributions to theParticipant with respect to a separation from service are to be paid.



e. Default:

i. Default occurs when any payment of principal or interest is not made as set forth in the promissorynote. In the event of a default, the Participant shall be given a reasonable opportunity to cure suchdefault. The cure period shall end not later than the last day of the calendar quarter following thecalendar quarter in which the required installment payment was due.

ii. After the cure period has expired, if such default is not cured, the unpaid balance of the loan shallbecome due and payable, will be treated as a deemed distribution to the Participant. Further, theunpaid balance of such loan, together with any accrued but unpaid interest on the loan, may in theAdministrative Committee�s discretion be charged against the Participant�s segregated loan account.

iii. If after the Participant�s segregated loan account has been so charged, there remains an unpaidbalance of any such loan and interest, then the remaining unpaid balance of such loan shall be chargedagainst any property pledged as security with respect to such loan.

iv. For any period of time after default during which the Participant�s outstanding loan balance has notbeen charged against his segregated loan account, the loan will be considered to be outstanding forpurposes of determining the amount available for subsequent loans under subsection 7.11(c) above.

SECTION 7.12 Withdrawals Prior to Termination of Employment and After Age 59-1/2.

a. A Participant who has attained age 59-1/2 may elect to withdraw amounts from his Before-Tax Account,After-Tax Account, Rollover Account, Matching Account, Salix Before-Tax Account, Salix RolloverAccount, Coherent Before-Tax Account and Coherent Rollover Account as of the Valuation Date coincidingwith or immediately preceding the date of such withdrawal; provided, however, that during a Plan Year notmore than one withdrawal shall be made pursuant to this Section 7.12; provided, further, for Plan Yearsstarting before December 31, 2001, that during a Plan Year, not more than an aggregate of two withdrawalsshall be made by a Coherent Participant from his Coherent Accounts under this Section 7.12, Section 7.10(Distribution of Participants� After-Tax Account, Rollover Accounts and Coherent Rollover Account) andSection 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals).

b. Withdrawals made pursuant to this Section 7.12 shall be charged against the Participant�s Accounts in thefollowing order:

i. Pre-1987 After-Tax Account;

ii. Post-1986 After-Tax Account;

iii. Rollover Account;

iv. Matching Account;

v. Before-Tax Account;

vi. Salix Before-Tax Account or Coherent Before-Tax Account;

vii. Salix Rollover Account or Coherent Rollover Account.

and made from the separate Funds in which such Accounts are invested pursuant to procedures established bythe Administrative Committee, subject to the limitations or restrictions thereon imposed by the sponsor(s) ofthe respective Funds or by Section 5.2 (Common Fund).



SECTION 7.13 Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals.

a. Withdrawals Prior to Age 59-1/2. Effective for Plan Years starting on or after December 31, 2001, nowithdrawals will be allowed for Participants prior to the age of 59-1/2, except as provided in subsection (b)below. For Plan Years prior to January 1, 2002, a Coherent Participant who has completed at least five (5)Years of Services may elect to withdraw all or a portion of his Coherent Employer Account and CoherentRollover Account. Withdrawals made pursuant to this subsection 7.13(a) shall be charged against theCoherent Participants Coherent Accounts in the following order; provided, however, that during a Plan Yearnot more than two withdrawals from a Coherent Participant�s Coherent Accounts shall be made pursuant tothis Section 7.13, Section 7.10 (Distribution of Participant�s After-Tax Account, Rollover Accounts, SalixRollover Accounts and Coherent Rollover Accounts Prior to Termination of Employment) and Section 7.12(Withdrawals Prior to Termination of Employment and After Age 59-1/2).

b. Hardship. A Participant who has not attained age 59-1/2 may, upon the determination by the AdministrativeCommittee that he has incurred a financial hardship, make a hardship withdrawal from his Before-TaxContributions and Employer Matching Contributions (together with any income allocated to his Before-TaxAccount and Matching Account as of December 31, 1988), After-Tax Account, Rollover Account, SalixBefore-Tax Account, Salix Rollover Account, Coherent Before-Tax Account and Coherent Rollover Account(but only to the extent of the pre-tax contributions made and pre-1989 earnings allocated thereto).

c. In any case where the Participant claims financial hardship, he shall submit a written request for suchdistribution in accordance with procedures prescribed by the Administrative Committee. The AdministrativeCommittee shall determine whether the Participant has a financial hardship on the basis of such writtenrequest in accordance with this Section 7.10, and such determination shall be made in a uniform andnondiscriminatory manner. The Administrative Committee shall only make a determination of financialhardship if the distribution is requested on account of an immediate and heavy financial need of theParticipant and the funds to be distributed are necessary to satisfy the Participant�s need, taking into accountany amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated toresult from the distribution.

i. The determination of whether a Participant has an immediate and heavy financial need is to be madeby the Administrative Committee on the basis of all the relevant facts and circumstances. Thefollowing expenses shall be deemed to constitute an immediate and heavy financial need:

A. expenses for medical care (as described in Code Section 213(d)) previously incurred by theParticipant, the Participant�s spouse or any dependents of the Participant (as defined in CodeSection 152) or necessary for these persons to obtain such medical care;

B. the purchase (excluding mortgage payments) of a principal residence for the Participant;

C. tuition and related educational fees (including room and board) due for the next 12 months ofpost-secondary education for the Participant, the Participant�s spouse, children ordependents;

D. the need to prevent the eviction of the Participant from his principal residence or foreclosureon the mortgage of the Participant�s principal residence; or

E. payments necessary to prevent utility shut off or similar immediate housing needs, of theParticipant, or the Participant�s spouse, children or dependents (as defined in CodeSection 152), payments for child custody or dependent sponsorship fees and expenses,payments for emergency travel expenses, and other similar events or expenses determined tobe an immediate and heavy financial need by the Administrative Committee.



vi. The determination of whether a distribution is necessary to satisfy the immediate and heavy financialneed of the Participant shall be made by the Administrative Committee on the basis of all relevantfacts and circumstances. The Administrative Committee may determine that a distribution isnecessary to satisfy the immediate and heavy financial need of the Participant if the Participantreasonably demonstrates that all of the following requirements are satisfied:

A. the distribution is not in excess of the amount of the immediate and heavy financial need ofthe Participant, taking into account any amounts necessary to pay any federal, state or localincome taxes or penalties reasonably anticipated to result from the distribution;

B. the Participant has obtained all distributions (other than hardship distributions), and allnontaxable loans that would not cause a financial hardship under all of the plans maintainedby the Employer or any Affiliate;

C. the Participant will not make any contributions to any retirement plan (other than mandatoryemployee contributions to a defined benefit plan) maintained by the Employer or anyAffiliate for 12 months (6 months effective for hardship distributions made afterDecember 31, 2001) after receiving the hardship distribution; and

D. the Participant�s Before-Tax Contributions to this Plan and to all plans maintained by theEmployer or any Affiliate in the calendar year following the calendar year of the hardshipdistribution do not exceed the limitation in Code Section 402(g)(1) applicable to suchfollowing calendar year, minus the amount of his Before-Tax Contributions for the calendaryear of the hardship distribution.

b. Any withdrawals under this Section 7.13 shall not reduce the Participant�s Before-Tax Account below theamount of twice the balance of any outstanding loan made pursuant to Section 7.11 (Loans).

c. Withdrawals made pursuant to this Section 7.13 shall be charged against the respective Accounts invested inthe separate Funds. The amounts withdrawn from such separate Funds shall be determined pursuant toprocedures established by the Administrative Committee and subject to the limitations or restrictions thereonimposed by the sponsor(s) of the respective Funds.

d. Withdrawals made pursuant to this Section 7.13 shall be charged against the Participant�s Accounts in theorder provided in subsection 7.12(b) above.

e. Withdrawals made pursuant to this Section 7.13 from a Coherent Participant�s Coherent Accounts shall besubject to the provisions of Section 7.2 (Qualifying Joint and Survivor Annuity � Retirement Account, SalixAccounts and Coherent Accounts).

SECTION 7.14 Eligible Rollover Distributions.

a. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee�s electionunder Article 6 (Amount of Payments to Participants), a distributee may elect, at the time and in the mannerprescribed by the Administrative Committee, to have any portion of an eligible rollover distribution paiddirectly to an eligible retirement plan specified by the distributee in a direct rollover.

b. Eligible rollover distribution: an eligible rollover distribution is any distribution of all or any portion of thebalance to the credit of the distributee, except that an eligible rollover distribution does not include: anydistribution that is one of a series of substantially equal periodic payments (not less frequently than annually)made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of thedistributee and the distributee�s designated beneficiary, or for a specified period of ten years or more; any



distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of anydistribution that is not includible in gross income (determined without regard to the exclusion for netunrealized appreciation with respect to employer securities), beginning with the 2000 Plan Year, anydistribution that is a hardship distribution described in Code Section 401(k)(2)(B)(i)(IV); and beginning withthe 2002 Plan Year, any distribution which is made upon hardship of the employee.

c. Eligible retirement plan: an eligible retirement plan is an individual retirement account described in CodeSection 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan describedin Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee�seligible rollover distribution. However, in the case of an eligible rollover distribution made on or beforeDecember 31, 2001 to the surviving spouse, an eligible retirement plan is an individual retirement account orindividual retirement annuity.

For distributions made on or after January 1, 2002, an eligible retirement plan shall also mean an annuitycontract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintainedby a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivisionof a state and which agrees to separately account for amounts transferred into such plan from this Plan. Thedefinition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to aspouse or former spouse who is the Alternate Payee under a Qualified Domestic Relation Order, as defined inCode Section 414(p).

d. For distributions made on or after January 1, 2002, a portion of a distribution shall not fail to be an eligiblerollover distribution merely because the portion consists of After-Tax Contributions which are not includiblein gross income. However, such portion may be transferred only to an individual retirement account or annuitydescribed in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section401(a) or 403(a) that agrees to separately account for amounts so transferred, including separately accountingfor the portion of such distribution which is includible in gross income and the portion of such distributionwhich is not so includible.

e. Distributee: a distributee includes an employee or former employee. In addition, the employee�s or formeremployee�s surviving spouse and the employee�s or former employee�s spouse or former spouse who is theAlternate Payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p), aredistributees with regard to the interest of the spouse or former spouse.

f. Direct rollover: a direct rollover is a payment by the Plan to the eligible retirement plan specified by thedistributee.

SECTION 7.15 Facility of Payment. When, in the Administrative Committee�s opinion, a Participant orbeneficiary is under a legal disability or is incapacitated in any way so as to be unable to manage his affairs, theAdministrative Committee may direct the Trustee to make payments:

a. directly to the Participant or beneficiary;

b. to a duly appointed guardian or conservator of the Participant or beneficiary;

c. to a custodian for the Participant or beneficiary under the Uniform Gifts to Minors Act;

d. to an adult relative of the Participant or beneficiary; or

e. directly for the benefit of the Participant or beneficiary.



Any such payment shall constitute a complete discharge therefor with respect to the Trustee and the AdministrativeCommittee.

SECTION 7.16 Claims Procedure.

a. Any person who believes that he is then entitled to receive a benefit under the Plan, including one greater thanthat initially determined by the Administrative Committee, may file a claim in writing with the AdministrativeCommittee.

b. The Administrative Committee shall within 90 days of the receipt of a claim either allow or deny the claim inwriting. A denial of a claim shall be written in a manner calculated to be understood by the claimant and shallinclude:

i. the specific reason or reasons for the denial;

ii. specific references to pertinent Plan provisions on which the denial is based;

iii. a description of any additional material or information necessary for the claimant to perfect the claimand an explanation of why such material or information is necessary; and

iv. an explanation of the Plan�s claim review procedure.

e. A claimant whose claim is denied (or his duly authorized representative) may, within 60 days after receipt ofdenial of his claim:

i. submit a written request for review to the Administrative Committee;

ii. review pertinent documents; and

iii. submit issues and comments in writing.

d. The Administrative Committee shall notify the claimant of its decision on review within 60 days of receipt ofa request for review. The decision on review shall be written in a manner calculated to be understood by theclaimant and shall include specific reasons for the decision and specific references to the pertinent Planprovisions on which the decision is based.

e. The 90-day and 60-day periods described in subsections (b) and (d) above, respectively, may be extended atthe discretion of the Administrative Committee for a second 90- or 60-day period, as the case may be,provided that written notice of the extension is furnished to the claimant prior to the termination of the initialperiod, indicating the special circumstances requiring such extension of time and the date by which a finaldecision is expected.

f. Participants and beneficiaries shall not be entitled to challenge the Administrative Committee�sdeterminations in judicial or administrative proceedings without first complying with the procedures in thisArticle. The Administrative Committee�s decisions made pursuant to this Section are intended to be final andbinding on Participants, beneficiaries and others. Further, no legal actions may be commenced with respect toa request by Participant or Participant�s beneficiary for benefits later than two (2) years after the Participant orParticipant�s beneficiary originally filed his claim for benefits.



ARTICLE 8

Top-Heavy Plan Requirements

SECTION 8.1 Top-Heavy Definitions. For purposes of this Article 8:

a. For Plan Years prior to January 1, 2002, a �Key Employee� is any current or former employee (and thebeneficiaries of such employee) who at any time during the Determination Period was an officer of theEmployer or an Affiliate if such individual�s annual compensation exceeds 50% of the defined benefit dollarlimitation in Code Section 415(b)(1)(A), an owner (or considered an owner under Code Section 318) of one ofthe 10 largest interests in the Employer if such individual�s compensation exceeds 100% of the DefinedContribution Dollar Limitation, a Five-Percent Owner, or a One-Percent Owner of the Employer who has anannual compensation of more than $150,000. Annual compensation means Total Compensation plus amountscontributed by the Employer pursuant to a salary reduction agreement which are excludable from theemployee�s gross income under Code Section 125, 402(e)(3), 402(h)(1)(B) or 403(b).

For Plan Years beginning on or after January 1, 2002, a �Key Employee� is any employee or former employee(including any deceased employee) who at any time during the Determination Period was an officer of theEmployer having annual compensation greater than $130,000 (as adjusted under Code Section 416(i)(1) forPlan Years beginning after December 31, 2002), a 5-percent owner of the Employer, or a 1-percent owner of theEmployer having annual compensation of more than $150,000. For this purpose, annual compensation meanscompensation within the meaning of Code Section 415(c)(3).

The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and theregulations thereunder.

b. For any Plan Year beginning after December 31, 1983, this Plan is �Top-Heavy� if any of the followingconditions exists:

i. The Top-Heavy Ratio for this Plan exceeds 60% and this Plan is not part of any RequiredAggregation Group or Permissive Aggregation Group of plans;

ii. This Plan is a part of a Required Aggregation Group of plans but not part of a Permissive AggregationGroup and the Top-Heavy Ratio for the group of plans exceeds 60%;

iii. This Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group ofplans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%.

d. The �Top-Heavy Ratio� shall be determined as follows:

i. If the Employer maintains one or more defined contribution plans (including any SimplifiedEmployee Pension Plan) and the Employer has not maintained any defined benefit plan which duringthe 5-year period ending on the Top-Heavy Determination Date(s) has or has had accrued benefits, theTop-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group asappropriate is a fraction, the numerator of which is the sum of the Account balances of all KeyEmployees as of the Top-Heavy Determination Date(s) (including any part of any Account balancedistributed in the 5-year period ending on the Top-Heavy Determination Date(s)), and thedenominator of which is the sum of all Account balances (including any part of any Account balancedistributed in the 5-year period ending on the Top-Heavy Determination Date(s)), both computed inaccordance with Code Section 416 and the regulations thereunder. Both the numerator anddenominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of



the Top-Heavy Determination Date, but which is required to be taken into account on that date underCode Section 416 and the regulations thereunder.

ii. If the Employer maintains one or more defined contribution plans (including any SimplifiedEmployee Pension Plan) and the Employer maintains or has maintained one or more defined benefitplans which during the 5-year period ending on the Top-Heavy Determination Date(s) has or has hadany accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group asappropriate is a fraction, the numerator of which is the sum of Account balances under the aggregateddefined contribution plan or plans for all Key Employees, determined in accordance withsubsection (i) above, and the Present Value of accrued benefits under the aggregated defined benefitplan or plans for all Key Employees as of the Top-Heavy Determination Date(s), and the denominatorof which is the sum of the Account balances under the aggregated defined contribution plan or plansfor all Participants, determined in accordance with subsection (i) above, and the Present Value ofaccrued benefits under the aggregated defined benefit plan or plans for all Participants as of the Top-Heavy Determination Date(s), all determined in accordance with Code Section 416 and theregulations thereunder. The accrued benefits under a defined benefit plan in both the numerator anddenominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made inthe 5-year period ending on the Top-Heavy Determination Date.

iii. For purposes of subsections (i) and (ii) above the value of Account balances and the Present Value ofaccrued benefits will be determined as of the most recent Valuation Date that falls within or ends withthe 12-month period ending on the Top-Heavy Determination Date, except as provided in CodeSection 416 and the regulations thereunder for the first and second plan years of a defined benefitplan. The Account balances and accrued benefits of a Participant:

A. who is not a Key Employee but who was a Key Employee in a prior year; or

B. who has not been credited with at least one Hour of Service with any Employer maintainingthe Plan at any time during the 5-year period ending on the Top-Heavy Determination Date

will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers,and transfers are taken into account, will be made in accordance with Code Section 416 and the regulationsthereunder. Deductible employee contributions will not be taken into account for purposes of computingthe Top-Heavy Ratio. When aggregating plans the value of Account balances and accrued benefits will becalculated with reference to the Top-Heavy Determination Date(s) that fall within the same calendar year. Theaccrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any,that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (2) ifthere is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permittedunder the fractional rule of Code Section 411(b)(1)(C).

d. The �Present Value� shall be based on an interest assumption of 5% and a post-retirement mortalityassumption based on the UP-1984 Mortality Table. However, for Plan Years beginning on or after January 1,2002, see subsection (f) below.

e. �Employer� for the purposes of this Article 8 (Top-Heavy Plan Requirements) means the Employer and allAffiliates except for purposes of determining ownership under Code Section 416(i)(1).

f. For Plan Years beginning on or after January 1, 2002, this subsection (f) shall apply for purposes ofdetermining the present values of accrued benefits and the amounts of account balances of employees as of thedetermination date.



i. Distributions during year ending on the determination date. The present values of accrued benefitsand the amounts of Account balances of an employee at any time during the Determination Periodshall be increased by the distributions made with respect to the employee under the Plan and any planaggregated with the Plan under Code Section 416(g)(2) during the 1-year period ending on the lastday of the Determination Period. The preceding sentence shall also apply to distributions under aterminated plan which, had it not been terminated, would have been aggregated with the Plan underCode Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separationfrom service, death, or disability, this provision shall be applied by substituting �5-year period� for�1-year period.�

ii. Employees not performing services during the year ending on the Top Heavy Determination Date.The accrued benefits and Accounts of any individual who has not performed services for theEmployer during the 1-year period ending on the Top Heavy Determination Date shall not be takeninto Account.

c. Minimum Benefits. For Plan Years beginning on or after January 1, 2002, Employer Matching Contributionsshall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section416(c)(2) and the Plan. The preceding sentence shall apply with respect to Matching Contributions under thePlan or, if the Plan provides that the minimum contribution requirement shall be met in another plan, suchother plan. Employer Matching Contributions that are used to satisfy the minimum contribution requirementsshall be treated as Matching Contributions for purposes of the actual contribution percentage test and otherrequirements of Code Section 401(m).

SECTION 8.2 Top-Heavy Plan Requirements.

a. Except as otherwise provided in subsections (b) and (c) below, the Profit Sharing Contributions (exclusive ofany Before-Tax Contributions) and forfeitures allocated on behalf of any Participant who is not a KeyEmployee shall not be less than the lesser of three percent of such Participant�s Total Compensation, or in thecase where the Employer has no defined benefit plan which designates this Plan to satisfy Code Section 401,the largest percentage of Profit Sharing Contributions (inclusive of any Before-Tax Contributions) andforfeitures, as a percentage of the Key Employee�s Total Compensation, allocated on behalf of any KeyEmployee for that year. The minimum allocation is determined without regard to any Social Securitycontribution. This minimum allocation shall be made even though, under other Plan provisions, the Participantwould not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the yearbecause of:

i. the Participant�s failure to complete 1,000 Hours of Service (or any equivalent provided in the Plan);

ii. the Participant�s failure to make mandatory employee contributions to the Plan; or

iii. Total Compensation less than a stated amount.

d. The provision in subsection (a) above shall not apply to any Participant who was not employed by theEmployer or an Affiliate on the last day of the Plan Year.

e. The provision in subsection (a) above shall not apply to any Participant to the extent the Participant is coveredunder any other plan or plans of the Employer and the Employer�s contribution and forfeitures allocated undersuch plan or plans are equal to or exceed the amount required to be allocated under subsection (a) above.

f. The minimum allocation required (to the extent required to be nonforfeitable under Code Section 416(b)) maynot be forfeited under Code Section 411(a)(3)(B) or 411(a)(3)(D).



g. For any Plan Year in which this Plan is Top-Heavy, the following schedule shall be substituted for theschedule set forth in Section 6.5 (Vesting), provided that Section 6.5 (Vesting) shall apply to the extent thatthe nonforfeitable percentage thereunder is greater than the following schedule:

Years of Service NonforfeitablePercentage

Less than 2 0

2 but less than 3 20



5 or more 100

The minimum vesting schedule applies to all benefits within the meaning of Code Section 411(a)(7) exceptthose attributable to employee contributions, including benefits accrued before the effective date of CodeSection 416 and benefits accrued before the Plan became Top-Heavy. Further, no decrease in a Participant�snonforfeitable percentage may occur in the event the Plan�s status as Top-Heavy changes for any Plan Year.However, this Section does not apply to the Account balances of any employee who does not have an Hour ofService after the Plan has initially become Top-Heavy and such employee�s Account balance attributable toProfit Sharing Contributions and forfeitures will be determined without regard to this Section 8.2.

h. If a Participant has 3 or more Years of Service as of the last day of the Plan Year for which the vestedpercentage of his Employer Account was subject to subsection (e) above, he may elect to have the vestedpercentage of his Employer Account determined under subsection (e) above in any subsequent Plan Yearwhen this Section 8.2 is not applicable.

ARTICLE 9

Powers and Duties of Committees

SECTION 9.1 Appointment of Committees.



a. The Board of Directors of the Company shall name an Administrative Committee to consist of not less than3 persons to serve as administrator and named fiduciary of the Plan. The Board of Directors shall also name anInvestment Committee hereunder to review investment performance of the Trust Fund, to establish theinvestment policy for the Trustee, to direct investment of the assets of the Trust Fund and to take such otheraction provided in this Plan. Any person, including directors, shareholders, officers and employees of theEmployer, shall be eligible to serve on the Committees. Every person appointed a member of the Committeesshall signify his acceptance in writing to the Board of Directors. In the event the Board of Directors does notappoint an Administrative Committee pursuant to this Section 9.1, the Company shall act as the administratorand a named fiduciary of the Plan and all references to the Administrative Committee shall mean references tothe Company so acting as administrator and a named fiduciary of the Plan.

b. Members of the Committees shall serve at the pleasure of the Board of Directors and may be removed by theBoard of Directors at any time with or without cause. Any member of the Committees may resign by givingten days advanced written notice to the Company and other Committee members. Such resignation shallbecome effective at delivery or at any later date specified therein. While there is a vacancy in the membershipon a Committee the remaining Committee members shall have the same powers as the full Committee untilthe vacancy is filled.

c. Usual and reasonable expenses of the Committees may be paid in whole or in part by the Employer and anysuch expenses not paid by the Employer shall be paid by the Trustee out of the principal or income of theTrust Fund. The members of the Committees shall not receive any compensation for their services as such.

SECTION 9.2 Powers and Duties of Administrative Committee. Except as otherwise provided in this Article 9, theAdministrative Committee shall have final and binding discretionary authority to control and manage the operation andadministration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functionshereunder, whether or not such rights and powers are specifically enumerated herein. In exercising its responsibilitieshereunder, the Administrative Committee may manage and administer the Plan through the use of agents who mayinclude employees of the Employer.

Without limiting the generality of the foregoing, and in addition to the other powers set forth in this Article 9, theAdministrative Committee shall have the following discretionary authorities:

a. To construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner andtime of payment of any benefits hereunder.

b. To prescribe procedures and regulations to be followed by Participants or beneficiaries with respect to thefiling of elections, requests, applications for benefits, consents and waivers, which procedures and regulationsmay include the utilization of telephone voice response, internet or intranet systems or other electronic mediaas an equivalent means for filing written paper documents.

c. To prepare and distribute, in such manner as the Administrative Committee determines to be appropriate,information explaining the Plan and a Participant�s or beneficiary�s rights hereunder, which manner mayinclude utilization of a telephone voice response, internet or intranet system, or other electronic media as anequivalent means for filing written paper documents.

d. To request and receive from each Employer, Participants and others such information as shall be necessary forthe proper administration of the Plan.

e. To furnish the Company upon request such annual and other reports with respect to the administration of thePlan as are reasonable and appropriate.



f. To receive, review and maintain on file reports of the financial condition and of the receipts anddisbursements of the Trust Fund from the Trustee.

g. To fix and determine the respective amounts payable by the Employers pursuant to Article 3 (Contributions).

h. To take such action not included within responsibilities allocated to the Board of Directors, the InvestmentCommittee, or the Trustee under the provisions of the Plan as may be needed to carry out the orderlyadministration of the Plan.

i. To determine all questions relating to the eligibility, benefits and other rights of employees, Participants andbeneficiaries under the Plan.

j. To allocate fiduciary responsibilities (other than Trustee responsibilities) among its members and to designateother persons to carry out nonfiduciary and fiduciary responsibilities (other than Trustee responsibilities).

k. To take such action as it deems appropriate to correct any errors or omissions with respect to theadministration of the Plan, including but not limited to causing to be allocated from future Contributions to theTrust Fund or causing distributions from the Trust Fund to be withheld, accelerated or adjusted in order toaccord to a Participant or beneficiary the allocations to his Accounts or distributions therefrom to which he isentitled under the Plan.

SECTION 9.3 Powers and Duties of the Investment Committee.

a. Except for responsibilities retained by the Board of Directors of the Company, the Investment Committeeshall have the responsibility to (i) review investment performance of the Trust Fund; (ii) establish investmentFunds pursuant to Section 5.2 (Common Fund); (iii) direct the Trustee with regard to the investment of assets;and (iv) such other responsibilities as may be delegated to it by the Board of Directors or pursuant to the Planor trust agreement.

b. In connection with these responsibilities, the Investment Committee shall have the following powers andduties:

i. to establish investment guidelines and objectives for the investment of the Trust Fund and eachinvestment Fund as a part thereof, including, but not by way of limitation, the establishment ofadditional investment funds or the consolidation of one or more of the existing funds;

ii. to review the performance of and appoint and dismiss the Trustee;

iii. to receive, review and retain (as it deems convenient or proper) reports of the investments and thereceipts and disbursements of the Trust Fund from the Trustee and/or any Investment Managers; and

iv. to manage the investment of any assets for which the Investment Committee serves as investmentadvisor.

e. The Investment Committee may, subject to periodic review, (i) allocate or delegate among its members certainpowers, (ii) authorize one or more of its members or an agent to execute or deliver any instruments or makepayment on the Investment Committee�s behalf, and (iii) utilize the services of agents and employ persons toperform ministerial, clerical, record-keeping, consulting or legal services to assist the Investment Committeein the performance of its duties.

f. The Investment Committee shall maintain records and accounts showing the fiscal transactions andperformance evaluations of the Trust Fund. At least annually, the Investment Committee shall submit to the



Board a report regarding the operation of the Trust during the past year and shall also submit such otherreports as the Board shall request.

SECTION 9.4 Committee Procedures.

a. Each Committee may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs.

b. A majority of the members of each Committee at the time in office shall constitute a quorum for thetransaction of business. All resolutions or other actions taken by the Committees at any meeting shall be bythe vote of the majority of the members of the Committees present at the meeting. Each Committee may actwithout a meeting by written consent of a majority of its members.

c. Each Committee may elect one of its members as chairman and may appoint a secretary, who may or may notbe a Committee member, and shall advise the Trustee and the Company of such actions in writing. Thesecretary shall keep a record of all actions of the Committees and shall forward all necessary communicationsto the Company or the Trustee.

d. Filing or delivery of any document with or to the secretary of a Committee in person or by registered orcertified mail, addressed in care of the Company, shall be deemed a filing with or delivery to the Committee.

SECTION 9.5 Consultation with Advisors. Each Committee (or any fiduciary designated by a Committeepursuant to Section 9.9 (Designation of Other Fiduciaries)) may employ or consult with counsel, actuaries, accountants,physicians or other advisors (who may be counsel, actuaries, accountants, physicians or other advisors for theEmployer).

SECTION 9.5 Committee Members as Participants. Each Committee member may also be a Participant, but noCommittee member shall have power to take part in any discretionary decision or action affecting his own interest as aParticipant under this Plan unless such decision or action is upon a matter which affects all other Participants similarlysituated and confers no special right, benefit or privilege not simultaneously conferred upon all other such Participants.

SECTION 9.7 Records and Reports. Each Committee shall take all such action as it deems necessary orappropriate to comply with governmental laws and regulations relating to the maintenance of records, notifications toParticipants, registrations with the Internal Revenue Service, reports to the U.S. Department of Labor and all otherrequirements applicable to the Plan. At the end of each Plan Year and such other periods as the AdministrativeCommittee may determine, the Administrative Committee will provide each Participant with a statement of the balancesin his Accounts.

SECTION 9.7 Investment Policy.

a. As provided in Section 9.3 (Powers and Duties of the Investment Committee), the Investment Committeefrom time to time shall determine the Plan�s short-term and long-term financial needs, with which theinvestment policy of the Trust shall be appropriately coordinated, and such needs shall be communicated fromtime to time to the Trustee, Investment Managers or others having any responsibility for management andcontrol of the Trust assets.

b. Subject to the provisions of Section 5.2 (Common Fund) relating to the investment direction of Participants,and to subsection (c) below, the Trustee shall have exclusive authority and discretion to manage and controlthe assets of the Trust pursuant to an investment policy coordinated with the needs of the Plan as determinedby the Investment Committee.

c. The Investment Committee may in its discretion manage or may appoint one or more Investment Managers tomanage (including the power to acquire and dispose of) any assets of the Plan pursuant to an investment



policy coordinated with the needs of the Plan as determined by the Investment Committee, in which event theTrustee shall not be liable for the acts or omissions of the Investment Committee or any such InvestmentManager or be under an obligation to invest or otherwise manage any asset of the Plan which is subject to themanagement of the Investment Committee or any such Investment Manager except as directed. Any suchInvestment Manager shall acknowledge in writing that he is a fiduciary with respect to the Plan.

d. The term �Investment Manager� shall mean:

i. a registered investment adviser under the Investment Advisers Act of 1940, as amended;

ii. a bank as defined in the Investment Advisers Act of 1940, as amended; or

iii. an insurance company qualified under the laws of more than one state to manage, acquire and disposeof plan assets.

SECTION 9.9 Designation of Other Fiduciaries. Each Committee may designate in writing other persons to carryout a specified part or parts of its responsibilities hereunder (including the power to designate other persons to carryout a part of such designated responsibility), but not including the power to appoint Investment Managers. Any suchdesignation shall be accepted by the designated person, who shall acknowledge in writing that he is a fiduciary withrespect to the Plan.

SECTION 9.10 Obligations of Each Committee.

a. Each Committee or its properly authorized delegate shall make such determinations as are necessary toaccomplish the purposes of the Plan with respect to individual Participants or classes of such Participants. TheCompany shall notify each Committee of facts relevant to such determinations, including, without limitation,length of Service, compensation for services, dates of death, permanent disability, granting or terminating ofleaves of absence, ages, retirement and termination of Service for any reason (but indicating such reason), andtermination of participation. The Company shall also be responsible for notifying each Committee of anyother facts which may be necessary for the Committee to discharge its responsibilities hereunder.

b. Each Committee is hereby authorized to act solely upon the basis of such notifications from the Company andto rely upon any document or signature believed by the Committee to be genuine and shall be fully protectedin so doing. For the purpose of this Section 9.10, a letter or other written instrument signed in the name of theCompany by any officer thereof shall constitute a notification from the Company; except that any action bythe Company or its Board of Directors with respect to the appointment or removal of a member of aCommittee or the amendment of the Plan and Trust or the designation of a group of employees to which thePlan is applicable shall be evidenced by an instrument in writing, signed by a duly authorized officer orofficers, certifying that said action has been authorized and directed by a resolution of the Board of Directorsof the Company.

c. Each Committee shall notify the Trustee of its actions and determinations affecting the responsibilities of theTrustee and shall give the Trustee directions as to payments or other distributions from the Trust Fund to theextent they may be necessary for the Trustee to fulfill the terms of the trust agreement.

d. Each Committee shall be under no obligation to enforce payment of contributions hereunder or to determinewhether contributions delivered to the Trustee comply with the provisions hereof relating to contributions, andis obligated only to administer this Plan pursuant to the terms hereof.

SECTION 9.11 Indemnification of Each Committee. Each Employer shall indemnify members of each Committeeand its authorized delegates who are employees of an Employer for any liability or expenses, including attorneys�fees, incurred in the defense of any threatened or pending action, suit or proceeding by reason of their status as



members of the Committee or its authorized delegates, to the full extent permitted by the law of the Employer�s stateof incorporation.

ARTICLE 10

Trustee and Trust Fund

SECTION 10.1 Trust Fund. A Trust Fund to be known as the Tellabs, Inc. Profit Sharing and Savings Trust hasbeen established by the execution of a trust agreement with one or more Trustees and is maintained for the purposes ofthis Plan. The assets of the Trust will be held, invested and disposed of by the Trustee, in accordance with the terms ofthe Trust, for the benefit of the Participants and their beneficiaries.

SECTION 10.2 Payments to Trust Fund and Expenses. All contributions hereunder will be paid into and creditedto the Trust Fund and all benefits hereunder and expenses chargeable thereto will be paid from the Trust Fund andcharged thereto.

SECTION 10.3 Trustee�s Responsibilities. The powers, duties and responsibilities of the Trustee shall be as setforth in the trust agreement and nothing contained in this Plan, either expressly or by implication, shall impose anyadditional powers, duties or responsibilities upon the Trustee.

SECTION 10.4 Reversion to the Employer. An Employer has no beneficial interest in the Trust Fund and no partof the Trust Fund shall ever revert or be repaid to the Employer, directly or indirectly, except that an Employer shallupon written request have a right to recover:

a. within one year of the date of payment of a contribution by an Employer, any amount (less any lossesattributable thereto) contributed through a mistake of fact;

b. within one year of the date on which any deduction for a contribution by an Employer under Code Section 404is disallowed, an amount equal to the amount disallowed (less any losses attributable thereto);

c. at the termination of the Plan, any amounts remaining in the Excess Forfeiture Suspense Account;

d. upon satisfaction of all liabilities for Medical Benefits arising out of the operation of Article 14 (RetireeMedical Benefits), any amounts remaining in the Medical Benefits Account.

ARTICLE 11

Amendment or Termination

SECTION 11.1 Amendment. The Company reserves the right to amend this Plan at any time to take effectretroactively or otherwise, in any manner which it deems desirable including, but not by way of limitation, the right toincrease or diminish contributions to be made by an Employer hereunder, to change or modify the method of allocationof its contributions, to change any provision relating to the distribution or payment, or both, of any assets of the Trust.

SECTION 11.2 Termination. The Company further reserves the right to terminate this Plan at any time.



SECTION 11.3 Form of Amendment, Discontinuance of Employer Contributions, and Termination Any suchamendment, discontinuance of Employer Contributions (as defined in Section 3.1 (Employer Contributions)) ortermination shall be made only by resolution of the Board of Directors or by an officer of the Company or by any personso duly authorized by resolution of the Board of Directors.

SECTION 11.4 Limitations on Amendments. The provisions of this Article 11 are subject to the followingrestrictions:

a. Except as provided in Section 10.4 (Reversion to the Employer), no amendment shall operate either directly orindirectly to give an Employer any interest whatsoever in any funds or property held by the Trustee under theterms hereof, or to permit corpus or income of the Trust to be used for or diverted to purposes other than theexclusive benefit of the Participants and their beneficiaries.

b. Except to the extent necessary to conform to the laws and regulations or to the extent permitted by anyapplicable law or regulation, no amendment shall operate either directly or indirectly to deprive anyParticipant of his nonforfeitable beneficial interest in his Accounts as they are constituted at the date of theamendment.

c. No amendment shall change any vesting schedule unless each Participant who has completed 3 or more Yearsof Service is permitted to elect to have the nonforfeitable percentage of his Employer Account and MatchingAccount computed under the Plan without regard to such amendment. The period for making such electionshall commence no later than the date of the adoption of such amendment and shall expire no earlier than60 days after the latest of the following dates:

i. the date the Plan amendment is adopted; or

ii. the date the Plan amendment becomes effective; or

iii. the date the Participant is issued written notice of the Plan amendment by the AdministrativeCommittee.

Notwithstanding the foregoing, no election need be offered to a Participant whose nonforfeitable percentage ofhis Employer Account and Matching Account cannot at any time be lower than such percentage determinedwithout regard to such amendment.

d. Except as permitted by applicable law, no amendment shall eliminate or reduce an early retirement benefit ora retirement-type subsidy or eliminate an optional form of benefit.

SECTION 11.5 Level of Benefits Upon Merger. This Plan shall not merge or consolidate with, or transfer assetsor liabilities to, any other plan, unless each Participant shall be entitled to receive a benefit immediately after saidmerger, consolidation or transfer (if such other plan were then terminated) which shall be not less than the benefit hewould have been entitled to receive immediately before said merger, consolidation or transfer (if this Plan were thenterminated).

SECTION 11.6 Vesting Upon Termination or Discontinuance of Employer Contributions; Liquidation of Trust.

a. This Plan shall be deemed terminated if and only if the Plan terminates by operation of law or pursuant toSection 11.2 (Termination). In the event of any termination or partial termination within the meaning of theCode, or in the event an Employer permanently discontinues the making of contributions to the Plan, theRetirement Account and Post-1992 Profit Sharing Account of each affected Participant who is employed bysuch Employer on the date of the occurrence of such event shall be nonforfeitable; provided, however, that in



no event shall any Participant or beneficiary have recourse to other than the Trust Fund for the satisfaction ofbenefits hereunder.

b. In the event an Employer permanently discontinues the making of contributions to the Plan, the Trustee shallmake or commence distribution to each Participant or his beneficiaries of the value of such Participant�sAccounts as provided herein within the time prescribed in Article 7 (Distributions). However, if, after suchdiscontinuance, the Company shall determine it to be impracticable to continue the Trust any longer, theCompany may, in its discretion, declare a date to be the Valuation Date for all Participants whose ValuationDate has not yet occurred, and the Trustee shall thereupon, as promptly as shall then be reasonable under thecircumstances, liquidate the Trust assets and distribute to each such Participant his Accounts in the TrustFund. Such date shall also constitute the final distribution date for each Participant or beneficiary whoseAccounts are being distributed in installments. Upon completion of such liquidation and distribution, the Trustshall finally and completely terminate.

c. The liquidation of the Trust, if any, in connection with any Plan termination shall be accomplished by theAdministrative Committee acting on behalf of the Company. After directing that sufficient funds be set asideto provide for the payment of all expenses incurred in the administration of the Plan and the Trust, to theextent not paid or provided for by the Employer, the Administrative Committee shall, as promptly as shallthen be reasonable under the circumstances, liquidate the Trust assets and distribute to each Participant orbeneficiary his Accounts in the Trust Fund. Notwithstanding the foregoing, if the Employer or an Affiliatemaintains another defined contribution plan, other than an employee stock ownership plan (as defined in CodeSection 4975(e) or 409) or a Simplified Employee Pension Plan, the Accounts of all Participants shall betransferred to the other plan; provided, however, that if fewer than 2% of the Participants in this Plan at thetime this Plan is terminated are or were eligible to participate under such other defined contribution plan atany time during the 24-month period beginning 12 months before the time of termination, a Participant�sAccounts shall be transferred to the other plan only if the vested balance of the Participant�s Accountsexceeds $3,500 and the Participant does not consent to the distribution of such Accounts. Upon completion ofsuch liquidation and distribution, the Trust shall finally and completely terminate. In the event theAdministrative Committee is no longer in existence, the actions to be taken by the Administrative Committeepursuant to this Section shall be taken by the Trustee. Effective with the 1998 Plan Year, $5,000 shall besubstituted for $3,500 in this subsection (c).

ARTICLE 12

Miscellaneous

SECTION 12.1 No Guarantee of Employment, Etc. Neither the creation of the Plan nor anything contained in thePlan or trust agreement shall be construed as a contract of employment between the Employer and the Participant or asgiving any Participant hereunder or other employee of the Employer any right to remain in the employ of an Employer,any equity or other interest in the assets, business or affairs of the Employer, or any right to complain about any actiontaken or any policy adopted or pursued by the Employer.

SECTION 12.2 Nonalienation.

a. Except as may be provided in the Plan with respect to loans to Participants, no Participant shall have any rightto sell, assign, pledge, hypothecate, anticipate or in any way create a lien upon any part of the Trust Fund.Except to the extent required by law or provided in the Plan, no interest in the Trust Fund, or any part thereof,



shall be assignable in or by operation of law, or be subject to liability in any way for the debts or defaults ofParticipants, their beneficiaries, spouses or heirs-at-law, whether to the Employer or to others.

b. Prior to the time that distributions are to be made hereunder, the Participants, their spouses, beneficiaries,heirs-at-law or legal representatives shall have no right to receive cash or other things of value from anEmployer or the Trustee from or as a result of the Plan and Trust.

SECTION 12.3 Qualified Domestic Relations Order. Notwithstanding anything in this Plan to the contrary,the Administrative Committee shall distribute a Participant�s Accounts, or any portion thereof, in accordance withthe terms of any domestic relations order entered on or after January 1, 1985, which the Administrative Committeedetermines to be a Qualified Domestic Relations Order described in Code Section 414(p). Further notwithstanding anyother provision of this Plan to the contrary, such distribution of a Participant�s Accounts, or any portion thereof, to anAlternate Payee under a Qualified Domestic Relations Order shall, unless such order otherwise provides, be made in asingle sum as soon as administratively practicable after the Administrative Committee has determined that a domesticrelations order is a Qualified Domestic Relations Order described in Code Section 414(p). No Qualified DomesticRelations Order shall permit the payment of any benefit in any amount, form of benefit, time of payment or any optionnot otherwise provided; however, to the extent provided in Code Section 414(p), benefits may be paid to an AlternatePayee in any form in which benefits may be paid to the Participant (even though the Participant has not separatedfrom Service) as if he had retired on the date payment is to begin under such Qualified Domestic Relations Order. Theaccount of any Alternate Payee shall be paid to such Alternate Payee immediately if the Qualified Domestic RelationsOrder so states.

SECTION 12.4 Controlling Law. To the extent not preempted by the laws of the United States of America, thelaws of the State of Illinois shall be controlling state law in all matters relating to the Plan.

SECTION 12.5 Severability. If any provision of this Plan shall be held illegal or invalid for any reason, saidillegality or invalidity shall not affect the remaining parts of this Plan, but this Plan shall be construed and enforced asif said illegal or invalid provision had never been included herein.

SECTION 12.6 Notification of Addresses. Each Participant and each beneficiary eligible for benefits under thisPlan shall file with the Administrative Committee from time to time in writing his post-office address and each changeof post-office address. Any communication, statement or notice addressed to the last post-office address filed withthe Administrative Committee, or if no such address was filed with the Administrative Committee, then to the lastpost-office address of the Participant or beneficiary as shown on an Employer�s records, will be binding on theParticipant and his beneficiary for all purposes of this Plan and neither the Administrative Committee nor the Employershall be obliged to search for or ascertain the whereabouts of any Participant or beneficiary, nor shall any Employer,Committee, director, officer, employee or agent of any of them be liable for any loss, cost or expense associated withany Participant�s or beneficiary�s failure to so file such Participant�s or beneficiary�s address with the AdministrativeCommittee.

SECTION 12.7 Gender and Number. Whenever the context requires or permits, the gender and number of wordsshall be interchangeable.

ARTICLE 13

Adoption by Affiliates



SECTION 13.1 Adoption of Plan. Subject to any resolution or terms of any agreement approved by the Boardof Directors of the Company or a Committee thereof to the contrary, any Affiliate may adopt this Plan for the benefitof its eligible employees if authorized to do so by the Board of Directors of the Company. Such adoption shall beby resolution of such Affiliate�s board of directors, a certified copy of which shall be filed with the Company, theAdministrative Committee and the Trustee. Upon such adoption, such Affiliate shall become an �Employer.�

SECTION 13.2 The Company as Agent for Employer Each Employer which has adopted this Plan pursuant toSection 13.1 (Adoption of Plan) hereby irrevocably gives and grants to the Company full and exclusive power conferredupon it by the terms of the Plan and Trust to take or refrain from taking any and all action which such Employer mightotherwise take or refrain from taking with respect to the Plan, including sole and exclusive power to exercise, enforceor waive any rights whatsoever which such Employer might otherwise have with respect to the Trust, and each suchEmployer, by adopting this Plan, irrevocably appoints the Company its agent for such purposes. Neither the Trusteenor any Committee nor any other person shall have any obligation to account to any such Employer or to follow theinstructions of or otherwise deal with any such Employer, the intention being that all persons shall deal solely withthe Company as if it were the sole company which had adopted this Plan. Each such Employer shall contribute suchamounts as determined under Article 3 (Contributions).

SECTION 13.3 Adoption of Amendments.

a. Any Employer which adopts this Plan pursuant to Section 13.1 (Adoption of Plan) may amend this Plan withrespect to its own employees by resolution of its board of directors, if authorized to do so by the Board ofDirectors of the Company or any person so duly authorized by the Board of Directors of the Company.

b. Any Employer shall be deemed conclusively to have assented to any amendment of this Plan by the Companywithout the necessity of any affirmative action on the part of such Employer.

SECTION 13.4 Termination. Any Employer which adopts this Plan pursuant to Section 13.1 (Adoption of Plan)may terminate this Plan with respect to its own employees by resolution of its board of directors, if authorized to do soby the Board of Directors of the Company, or any person so duly authorized by the Board of Directors of the Company.

SECTION 13.5 Data to Be Furnished by Employers. Each Employer which adopts this Plan pursuant toSection 13.1 (Adoption of Plan) shall furnish information and maintain such records with respect to its Participants ascalled for hereunder, and its determinations and notifications with respect thereto shall have the same force and effectas comparable determinations by the Company with respect to its Participants.

SECTION 13.6 Joint Employers. If a Participant receives Considered Compensation during a Plan Year frommore than one Employer, the total amount of such Considered Compensation shall be considered for the purposes ofthe Plan, and the respective Employers shall share in contributions to the Plan on account of said Participant based onthe Considered Compensation paid to such Participant by the Employer.

SECTION 13.7 Expenses. Except to the extent paid by the Employers, all expenses of the Plan shall be paid fromthe Trust Fund as the Administrative Committee from time to time may direct in accordance with the trust agreement.

SECTION 13.8 Withdrawal. An Employer may withdraw from the Plan by giving 60 days� written notice of itsintention to the Company and the Trustee, unless a shorter notice shall be agreed to by the Company.

SECTION 13.9 Prior Plans. If an Employer adopting the Plan already maintains a defined contribution plancovering employees who will be covered by this Plan, it may, with the consent of the Company, provide in its resolutionadopting this Plan for the termination of its own plan or for the merger, restatement and continuation, of its own planby this Plan. In either case, such Employer may, subject to the approval of the Company, provide in its resolution ofadoption of this Plan for the transfer of the assets of such plan to the Trust for this Plan for the payment of benefitsaccrued under such other plan.



ARTICLE 14

Retiree Medical Benefits

SECTION 14.1 Medical Benefits Account. Effective April 1, 1999, there is created, established and maintaineda separate Medical Benefits Account as part of the Retirement Program for the purposes of providing certain medicalbenefits to Eligible Individuals in accordance with this Article 14 and Code Section 401(h).

SECTION 14.2 Retiree Medical Benefits Definitions. For purposes of this Article 14, the following definitionsshall apply:

a. Dependent. The term �Dependent� shall mean any individual who is entitled to benefits under the Health Planas a dependent of an eligible retiree provided that such individual is a �dependent� within the meaning ofCode Section 152.

b. Eligible Individual. The term �Eligible Individual� shall mean an Eligible Retiree or a Dependent.

c. Eligible Retiree. The term �Eligible Retiree� shall mean an individual who:

i. is a Participant in the Retirement Program and who retires under circumstances which entitle theParticipant to receive retiree medical benefits under the Health Plan; and

ii. is not a Key Employee (as defined in Code Section 416(i)(1)) at any time during the current Plan Yearand has not been a Key Employee at any time during any previous Plan Year for which contributionswere made to the Medical Benefits Account.

c. Health Plan. The term �Health Plan� shall mean Tellabs Retiree Medical Plan, or such other medical planmaintained by an Employer, but only as such plan relates to retired individuals and dependents, as suchRetiree Medical Plan or plans may be amended from time to time, and the provisions of such Retiree MedicalPlan or plans are incorporated herein by reference.

d. Medical Benefits. The term �Medical Benefits� shall mean the benefits specified and payable underSection 14.6 (Medical Benefits) from the Medical Benefits Account.

e. Medical Benefits Account. The term �Medical Benefits Account� shall mean the separate account establishedpursuant to Section 14.3 (Separate Account) for contributions to fund Medical Benefits payable under thisArticle 14.

SECTION 14.3 Separate Account. A Medical Benefits Account shall be maintained with respect to contributionsto fund the benefits payable under this Article 14, which shall be kept separate (for record-keeping purposes only)from the amounts contributed to the Retirement Program to fund all other benefits. The funds in the Medical BenefitsAccount shall be invested as the Investment Committee shall determine, and may, but need not be, invested in one ormore of the Funds; provided, however, that in no event shall amounts allocable to the Medical Benefits Account beinvested in the Tellabs Stock Fund.

SECTION 14.4 Impossibility of Diversion Prior to Satisfaction of All Liabilities. Prior to the satisfaction of allliabilities under this Article 14 to provide for the payment of Medical Benefits, no part of the corpus or income of the



Medical Benefits Account may be used for, or diverted to, any purpose other than the providing of Medical Benefits orthe payment of any necessary or appropriate expenses attributable to the administration thereof.

SECTION 14.5 Reversion upon Satisfaction of All Liabilities. Any amounts which are contributed to fundMedical Benefits and that remain in the Medical Benefits Account upon the satisfaction of all liabilities arising out ofthe operation of this Article 14 are to be returned to the Employer in accordance with Section 10.4 (Reversion to theEmployer).

SECTION 14.6 Medical Benefits. The Medical Benefits payable from the Medical Benefits Account shall belimited to the payment of medical benefits for Eligible Individuals under the Health Plan. Notwithstanding any otherprovision of this Article 14, the Medical Benefits paid out of the Medical Benefits Account at any time shall be limitedto the amount in such Account. The Medical Benefits provided under the Health Plan and the contributions by theEmployers to fund said Medical Benefits shall not discriminate in favor of Highly Compensated Employees.

SECTION 14.7 Coordination with Health Plan. Medical Benefits under the Medical Benefits Account shall beprovided by reimbursing, no less frequently than annually, the Employers or other paying agent under the Health Planfor amounts not to exceed the aggregate Medical Benefits, as defined in Section 14.6 (Medical Benefits), for EligibleIndividuals.

SECTION 14.8 Employer Contributions. All contributions to fund Medical Benefits provided under theMedical Benefits Account shall be made by the Employers. The Employers may, in their discretion, contribute to theMedical Benefits Account amounts which in the aggregate shall not exceed the amount reasonably estimated to coverthe total cost of the Medical Benefits to be provided hereunder. Such total cost shall be determined in accordance withany generally accepted actuarial method which is reasonable in view of the provisions and coverage of the Health Plan,the investment of the Medical Benefits Account and other applicable considerations. Notwithstanding the foregoing,Employer contributions to the Medical Benefits Account shall be limited so that the aggregate actual contributions madeto the Medical Benefits Account shall not exceed 25% of the total aggregate actual contributions made after April 1,1999 under the Retirement Program to the Retirement Accounts of Participants and the Medical Benefit Account. Atthe time an Employer makes a contribution to the Retirement Program, it shall designate the portion allocable to theMedical Benefits Account.

SECTION 14.9 Reservation of the Right to Terminate Medical Benefits. In addition to the rights set forth inArticle 11 (Amendment or Termination), the Employers reserve the right to amend, suspend, curtail or terminate theMedical Benefits provided hereunder or under the Health Plan at any time.



Management��s Discussion and Analysis

2001 Overview2001 was a challenging year for Tellabs due to the dramatic economic downturn in the telecommunications industry. As a result, there was an abrupt slowdown in capital spending levels by telecommunications carriers, particularly in the United States, as these companies began to recalibrate their capitalspending to align their capacity on hand with current end-customer demand levels. Tellabs responded by undertaking a series of restructurings intended to both realign its cost structure and reinvent its business to meet the new outlook for the industry. Major components of the Company�s restructuringefforts included: exiting the SALIX and NetCore next-generation switching program; discontinuing the development of the TITAN 6700 Optical Transport Switch; strategic realignment of worldwide manufacturing capacity; workforce reductions; a reduction of excess inventories and related purchasecommitments and a consolidation of facilities. Overall, the Company incurred pre-tax restructuring and other charges of $448.7 million ($321.6 million, after-tax, or $0.79 per diluted share). For a detailed discussion of the Company�s 2001 restructuring efforts, see Note 3, �Restructuring and OtherCharges.�

The effects of the economic slowdown were seen throughout the Company�s 2001 financial results. 2001 net sales totaled $2,199.7 million, down 35.1% compared with the prior year. The Company�s 2001 gross margin as a percentage of sales declined to 34.7%, compared with 54.2% last year, due toinventory-related charges of $250.2 million from the Company�s restructuring activities. Total operating expenses increased to $1,042.6 million in 2001 primarily from the inclusion of $192.3 million of 2001 restructuring charges. Other income for 2001 was $34.6 million, down 69.7% from 2000. Thereduction in other income was due to an additional $40.2 million earned in 2000 from sales of equity investments, along with the impairment write-down of various preferred and equity securities in 2001, which totaled $25.9 million. The Company�s 2001 effective tax rate was 25.6% compared with 31.5%in 2000, reflecting the tax implications of the various restructuring charges incurred during 2001. As a result, Tellabs incurred a net loss of $182.0 million or $0.44 per share, compared with net earnings of $730.8 million or $1.75 per diluted share outstanding in 2000. For a detailed comparison of 2001 and2000 results, please refer to the 2001 vs. 2000 Pro Forma Comparison.

On a positive note, Tellabs recognized its first revenues from sales of its new optical networking products, the TITAN 6500 Multiservice Transport Switch (�MTS�) and the TITAN 6100 Optical Transport Switch (�OTS�), which accounted for approximately 4% of overall revenues (please refer to theglossary for an explanation of technical terms). Tellabs also acquired Future Networks, Inc. (�FNI�), a leader in standards-based voice and cable modem technology, for approximately $141.8 million (for more information, see Note 5, �Business Combinations�). In addition, the Company announced thepending acquisition of Ocular Networks, Inc., a leader in next-generation optical solutions for the metropolitan edge, for about $355 million including options. This acquisition was completed in early January 2002.

Results of Operations

2001 vs. 2000 Pro Forma ComparisonAs previously mentioned above, the Company incurred pre-tax charges of approximately $448.7 million ($321.6 million, after-tax, or $0.79 per diluted share) in connection with its 2001 restructuring efforts as described in Note 3, �Restructuring and Other Charges.� In addition to these charges, there werealso a number of other non-comparable items in both years that the Company believes should be excluded from the comparison of operations for 2000 and 2001 in order to obtain a more accurate understanding of the Company�s core business. As a result, all 2001 vs. 2000 comparisons are derived from thepro forma results of operations from the chart below. Investors are advised to read the following comparisons in conjunction with the Company�s audited financial statements and notes thereto appearing elsewhere in this Annual Report.

(In millions, exceptper share data)

2001Reported

Restructuringand OtherCharges

Non-ComparableItems1

2001ProForma

2000Reported

Non-ComparableItems2

2000ProForma

Net sales $2,199.7 $ (6.2) � $2,205.9 $3,387.4 � $3,387.4Cost of goods sold 1,436.5 250.2 � 1,186.3 1,552.0 � 1,552.0Gross margin 763.2 (256.4) � 1,019.6 1,835.4 � 1,835.4Operating expenses 1,042.6 192.3 � 850.3 840.4 $ 5.8 834.6Operating margin (279.4) (448.7) � 169.3 995.0 (5.8) 1,000.8Other income 34.6 � $ (13.1) 47.7 114.4 53.0 61.4Earnings (loss)

before taxes (244.8) (448.7) (13.1) 217.0 1,109.4 47.2 1,062.2Net earnings

(loss) beforecumulative effect (182.0) (321.6) (9.0) 148.6 760.0 31.9 728.1

Cumulative effect, net � � � � (29.2) � (29.2)Net earnings $(182.0) $(321.6) $ (9.0) $ 148.6 $ 730.8 $ 31.9 $ 698.9Diluted EPS $ (0.44) $ (0.79) $ (0.02) $ 0.36 $ 1.75 $ 0.08 $ 1.67Diluted shares 409.6 409.6 413.8 413.8 418.4 418.4 418.41 2001 other income included a pre-tax loss of $25.9 million ($17.8 million, after-tax, or $0.04 per diluted share) related to the impairment write-down and subsequent sale of certain preferred and common stock investments and a pre-tax gain of $12.8 million ($8.8 million, after-tax, or $0.02 per diluted share) from the sale of stock held as an investment.2 2000 operating expenses included a pre-tax charge of $5.8 million related to the SALIX merger ($3.8 million, after-tax, or $0.01 per diluted share). 2000 other income included a pre-tax gain of $39.8 million on the sale of stock held as an investment ($26.9 million, after-tax, or $0.06 per diluted share) and a pre-tax gain of $13.2 million related to distributions fromthe Company�s technology investments ($8.8 million, after-tax, or $0.02 per diluted share).

2001 net sales totaled $2,205.9 million, a decrease of 34.9% compared with 2000 net sales levels. The primary driver behind the decrease in net sales was the slowdown in capital spending by the major telecommunications carriers, described above. Net product sales in 2001 were down 39.6% to $1,878.4million compared with $3,110.7 million in 2000, mainly due to lower sales of the Company�s optical networking products. Optical networking products sales for 2001 totaled $1,202.8 million compared with $2,153.4 million in 2000. Lower sales of the Company�s TITAN 5500/5500S and TITAN 532Ldigital cross-connect systems were the primary contributors to the overall shortfall in optical networking products revenue. During 2001, Tellabs recognized first revenues from sales of the new entrants to the Company�s optical networking product portfolio, the TITAN 6500 MTS and the TITAN 6100OTS, which accounted for approximately 4% of overall sales and partially mitigated the overall decline experienced from the slowdown in carrier spending. Broadband access product sales for 2001 totaled $538.0 million compared with $763.2 million in 2000. The 29.5% decline in broadband accessproducts sales was the result of a combination of lower CABLESPAN® 2300 universal telephony distribution system sales and lower MartisDXX® managed access and transport system sales, which offset gains during the year in sales of the Company�s FOCUSTM international-standard optical products.Sales of Tellabs voice-quality enhancement products totaled $137.6 million for 2001, down 29.1% due in large part to lower sales of echo cancellation products.

Net services and other revenues for 2001 totaled $327.5 million compared with $276.7 million for 2000. Net services and other revenues were generated from the Company�s services and solutions area, which provides a variety of professional services to customers, including the installation and testing ofthe Company�s products. The 18.4% growth was mainly a function of the completion of installation and testing services in 2001 related to the record fourth quarter 2000 sales of the Company�s optical networking products.

Sales within the United States for 2001 decreased 36.0% compared with 2000 and accounted for approximately 76.4% of total sales. Sales outside the United States decreased 31.0% compared with 2000 and accounted for approximately 23.6% of total sales.Gross margin as a percentage of sales for 2001 was 46.2% compared with 54.2% for 2000. Gross product margin as a percentage of sales for 2001 totaled 51.2% compared with 58.6% for 2000. The decrease in gross product margin as a percentage of sales for 2001 was due to a variety of factors

including:• a shift in overall product mix brought about by the abrupt slowdown in service provider spending, particularly in the United States, which had the greatest impact on the Company�s higher-margin optical networking products, and• lower sales leverage of the Company�s relatively fixed manufacturing expenditures, particularly in the first part of 2001, due to the combination of the slowdown in service provider spending and the fact that the Company had initially structured its operations for a much higher revenue target in

2001.Services and other gross margin as a percentage of sales for 2001 was 17.7% compared with 4.8% in 2000. The improvement was a function of both favorable expense leverage in 2001 due to the significant growth in net services and other revenues, and cost control efforts implemented in the Company�s

professional services area.Operating expenses for 2001 were $850.3 million compared with $834.6 million in 2000. As a percentage of sales, operating expenses in 2001 were 38.5% compared with 24.6% in 2000. Research and development expenditures for 2001 totaled $425.5 million compared with $415.2 million in 2000. The

growth in research and development spending was attributable to product development work on the two new optical networking products introduced in 2001, expenditures associated with the discontinued TITAN 6700 optical switch, and the inclusion of expenditures from Future Networks, Inc., which wasacquired in February 2001 (for more information, see Note 5, �Business Combinations�). The overall growth in research and development spending was partially offset by cost savings due to the discontinuation of the SALIX and NetCore next-generation switching initiative in April 2001. As a percentage ofsales, research and development spending was 19.3% in 2001 and 12.3% in 2000. The increase in research and development spending as a percentage of sales was primarily a function of lower sales volume in 2001.

Selling, general and administrative expenditures for 2001 totaled $400.3 million compared with $407.8 million in 2000. The reduction in selling, general and administrative spending was a direct byproduct of the Company�s 2001 restructuring efforts, coupled with the positive impact of stringent costsavings strategies implemented during the latter part of 2001. These cost saving strategies included curtailing discretionary spending, generally eliminating salary increases, instituting an executive level pay reduction and eliminating Global Incentive Plan bonuses for the year. These measures negated earlierspending growth that resulted from business infrastructure and staffing decisions made during the latter part of 2000 and early stages of 2001, based on the then-anticipated growth of the Company. As a percentage of sales, selling, general and administrative spending for 2001 increased to 18.1% comparedwith 12.0% in 2000, due primarily to lower sales volume in 2001.

Total other income for 2001 amounted to $47.7 million compared with $61.4 million in 2000. The reduction in total other income was mainly the result of lower interest income in 2001, which was the result of a combination of lower prevailing interest rates and lower short-term marketable securitieslevels, when compared to 2000.

The effective tax rate for both 2000 and 2001 was 31.5%. Tellabs� effective tax rate reflects the benefits of research and development tax credits and lower foreign tax rates, as compared with the United States federal statutory rate.

2000 OverviewTellabs achieved record levels in sales, net earnings and earnings per share in 2000. Net sales for 2000, totaled $3,387.4 million compared with $2,322.4 million in the prior year. The 45.9% increase in net sales was primarily the result of strong optical networking product sales. During 2000, the Companyadded two new products to its optical networking product portfolio, the TITAN 6500 MTS and the TITAN 6100 OTS. In addition, the Company announced a multiyear agreement to provide the TITAN 6500 system to a major carrier. The Company also made important additions to its other product lines,with the release of the FOCUS 6200 DWDM platform and the VERITY 3000 high-density digital echo canceller.

In addition to the various product releases during 2000, Tellabs acquired SALIX Technologies, Inc. (�SALIX�), a developer of next-generation switching solutions, in a transaction accounted for as a pooling of interests. As a result of the acquisition, the Company restated its results of operations, financialposition and cash flows (for more information see Note 5, �Business Combinations�).

Gross margin as a percentage of sales for 2000 was 54.2% compared with 59.5% in 1999. 2000 gross margin was negatively impacted by higher component costs and a shift in product mix.2000 operating expenses totaled $840.4 million compared with $650.5 million in 1999. The growth in operating expenses was necessary to fund the Company�s new product development efforts and support the business infrastructure in place to meet the then-anticipated growth of the Company. For an in-

depth discussion of operating expenses see the, �2000 vs. 1999 Pro Forma Comparison� below.Other income for 2000 totaled $114.5 million compared with $70.3 million in 1999. The growth in other income resulted from a $20.6 million increase in interest income, along with $13.2 million in distributions from the Company�s technology investments.During the fourth quarter of 2000, Tellabs implemented the Securities and Exchange Commission�s (�SEC�) Staff Accounting Bulletin No. 101 (�SAB 101�), �Revenue Recognition in Financial Statements� (for more information see Note 4, �Change in Accounting Principle�), which required the

Company to align its revenue recognition policies with certain customer-specific contractual provisions. Adoption of SAB 101 was recorded as a change in accounting method by reporting the cumulative effect of the change to prior periods in the first period of 2000. The cumulative effect of the changeresulted in a charge to earnings of $29.2 million (net of income taxes of $13.4 million).

The Company�s effective tax rate for 2000 and 1999 remained consistent at 31.5%. Net earnings for 2000 totaled $730.8 million ($1.75 per diluted share) compared with 1999 net earnings of $549.7 million ($1.32 per diluted share).

2000 vs. 1999 Pro Forma ComparisonThere were a number of non-comparable events that took place during 2000 and 1999, which bear mentioning. Below is a table displaying the non-comparable items for 2000 and 1999 along with the adjusted financial results, excluding the adoption of SAB 101 and the non-comparable items. In order toprovide a more meaningful comparison of Tellabs� results of operations, all subsequent discussions will be based on the pro forma results for 2000 and 1999, which exclude the impact of the adoption of SAB 101 and the impact of the non-comparable items.

(In millions, exceptper share data)

2000ReportedSAB 101

Non-ComparableItems

2000ProForma

1999Reported

Non-ComparableItems

1999ProForma

Sales $3,387.4 $ 58.8 $3,328.6 $2,322.4 $2,322.4Cost of goods sold 1,552.0 16.2 1,535.8 940.1 940.1Gross Margin 1,835.4 42.6 1,792.8 1,382.3 1,382.3Operating expenses1 840.4 $ 5.8 834.6 650.5 $ 1.9 648.6Operating margin 995.0 42.6 (5.8) 958.2 (1.9) 733.7Other income2 114.4 53.0 61.4 70.3 36.9 33.4Earnings before taxes 1,109.4 42.6 47.2 1,019.6 802.1 35.0 767.1Net earnings before

cumulative effect 760.0 29.2 31.9 698.9 549.7 24.0 525.7Cumulative effect, net (29.2) (29.2) � � � � �

Net earnings $730.8 � $ 31.9 $ 698.9 $ 549.7 $ 24.0 $ 525.7Diluted EPS $ 1.75 � $ 0.08 $ 1.67 $ 1.32 $ 0.06 $ 1.261Includes a pre-tax charge of $5.8 million ($3.8 million, after-tax, or $0.01 per diluted share) related to the SALIX acquisition in 2000. 1999 results include a pre-tax charge of $1.9 million ($1.3 million, after-tax) related to the acquisition of NetCore.22000 results include a pre-tax gain of $39.8 million ($26.9 million, after-tax, or $0.06 per diluted share) on the sale of stock held as an investment and a pre-tax gain of $13.2 million ($8.8 million, after-tax, or $0.02 per diluted share) related to distributions from the Company�s technology investments. 1999 results include a pre-tax gain of $36.9 million ($25.3million, after-tax, or $0.06 per diluted share) on the sale of stock held as an investment.

Sales for 2000 totaled $3,328.6 million, an increase of 43.3% over 1999 sales of $2,322.4 million. The growth in overall sales was primarily attributable to increased sales of optical networking products. Sales of optical networking products were $2,107.9 million in 2000, a 54.1% increase compared with$1,367.5 million in 1999. The growth in optical networking product sales was a result of continued strong demand for the Company�s TITAN 5500/5500S and TITAN 532L digital cross-connect systems.

Broadband access products sales totaled $753.3 million in 2000 compared with $540.5 million in 1999. The 39.4% growth in broadband access products sales was due in large part to demand for the Company�s CABLESPAN 2300 system, coupled with the inclusion of a full year�s sales for theCompany�s FOCUS international-standard optical products, obtained in the acquisition of Tellabs Denmark in the third quarter of 1999 (for more information, see Note 5, �Business Combinations�). Growth in broadband access product sales was partially offset by weaker sales of the Company�sMartisDXX managed access and transport system.

Voice-quality enhancement product sales fell to $191.4 million in 2000, a 28.4% decrease compared with $267.5 million in 1999. The decrease in voice-quality enhancement product sales was primarily attributable to lower sales of the Company�s digital echo cancellers.Net services and other revenues totaled $276.7 million for 2000 compared to $146.9 million in 1999. The 88.4% increase was due to growth in the Company�s services and solutions revenue that resulted from strong optical networking products sales in 2000. Tellabs� services and solutions area generates

revenues from the installation and testing of the Company�s various products.From a geographic standpoint, sales within the United States increased 57.8% and accounted for 77.4% of overall 2000 sales. Sales outside the United States increased 9.1% and accounted for 22.6% of overall sales.Gross margin as a percentage of sales for 2000 was 53.9%, down 5.6 percentage points from 59.5% in 1999. The decline in gross margin as a percentage of sales can be attributed primarily to higher component costs in 2000, which resulted from shortages of certain parts, coupled with increased sales of

lower margin products.Operating expenses for 2000 were $834.6 million, compared with $648.6 million in 1999. As a percentage of sales, operating expenses declined to 25.1% in 2000, compared to 27.9% in 1999. Research and development expenditures were $415.2 million in 2000, compared to $312.3 million in 1999. The

increase in research and development spending represents Tellabs� continued commitment to design, develop and bring new product applications to market in a timely manner, along with the inclusion of expenditures for Tellabs Denmark, which was acquired in the third quarter of 1999. As a percentage ofsales, research and development expenditures were 12.5% in 2000, compared with 13.4% in 1999.

Marketing, general and administrative expenditures totaled $407.8 million in 2000, compared with $329.1 million in 1999. The increase in marketing, general and administrative spending during 2000 reflects increased staffing and business infrastructure spending that was considered necessary to maintainthe then-anticipated growth of the Company, along with the inclusion of Tellabs Denmark expenditures for a full year. As a percentage of sales, marketing, general and administrative expenditures were 12.3% in 2000, compared with 14.2% in 1999. This improvement reflects Tellabs� continued efforts tofocus on cost controls and to utilize cost-effective means to support the growth of the business.

Other income for 2000 totaled $61.4 million, compared with $33.4 million in 1999. The increase in other income was attributed primarily to both higher average cash balances being available in 2000, along with generally higher returns being earned on investments.The effective tax rate for 2000 and 1999 was 31.5%. Overall, Tellabs� 2000 and 1999 effective tax rates reflect the benefits of research and development tax credits and lower foreign tax rates, as compared with the U.S. federal statutory rate.



Liquidity and Capital Resources

Tellabs� net working capital balance at December 28, 2001, was $1,625.1 million compared with $1,910.1 million at December 29, 2000. The Company�s current ratio at December 28, 2001, was 6.1 to 1 compared with 5.6 to 1 at the end of 2000.Tellabs� principal source of liquidity was its cash and equivalents and short-term investments, which totaled $1,101.6 million at December 28, 2001, and $1,022.3 million at December 29, 2000. The increase of $79.3 million was driven by net cash generated from operations of $419.3 million and from

financing activities of $18.4 million, which was used to fund capital expenditures of $208.2 million and the purchase of FNI for a net $130.8 million, as well as to absorb the exchange rate effects on the Company�s cash position, which totaled $16.0 million.The Company was able to generate operating cash flow of $419.3 million mainly as a result of its 2001 cash earnings of $340.0 million, which is defined as the net loss for the year adjusted for non-cash gains and charges, which principally included restructuring charges and depreciation and amortization.

The Company�s operating cash flow also benefited from a net inflow of $79.3 million from improvements in its financial position, brought about mainly as a result of strong accounts receivable collections of $424.7 million, which offset funding needs for income taxes, inventories and other liabilities andassets.

In addition, The Company generated net cash from its financing activities, primarily from the exercise of employee stock options, which totaled $20.9 million. The net cash generated from operating and financing activities was used to fund the Company�s investing activities for $49.1 million. Theprincipal investing cash outflows resulted from capital purchases totaling $208.2 million and the acquisition of FNI, which required net funds of $130.8 million. In addition, the Company liquidated a portion of its short-term investment portfolio for $289.9 million. This ensured the Company had sufficientcash on hand to fund the Ocular Networks, Inc. acquisition, which was completed in January 2002, and required approximately $300 million in cash.

The balance of the Company�s accounts receivable, net of allowances, totaled $330.9 million at December 28, 2001, compared with $802.5 million at December 29, 2000. The 58.8% reduction in accounts receivable was a function of strong collections of record fourth quarter 2000 receivables, coupledwith improved collections and lower overall sales levels in 2001. In addition, the Company increased its reserve for uncollectable accounts by $29.7 million, net of receivable write-offs of approximately $12.3 million, due to the downturn in the telecommunications industry and the overall weakness in theUnited States economy during 2001.

Days sales outstanding (�DSO�) at the end of 2001 was 64 days compared with 72 days in 2000. The Company continues to strive to lower its DSO by focusing on improving its underlying worldwide billing and collection process.The balance of net inventory at December 28, 2001, was $329.1 million compared with $428.3 million at December 29, 2000. The lower inventory levels reflect $120.3 million of excess inventory reserves. The reserves related mainly to excess CABLESPAN 2300 residential service units, inventory

associated with the terminated SALIX and NetCore next-generation switching program and the discontinued TITAN 6700 and various excess components and common piece parts brought about by the general slowdown in the telecommunications industry. Offsetting this was growth in inventory due to abuild-up in materials to support the introduction of the Company�s new 6000 series of optical networking products.

The Company�s current deferred tax assets totaled $138.2 million at December 28, 2001, compared with $29.8 million at December 29, 2001. The significant increase in the deferred tax assets was directly associated with the Company�s restructuring and other charges incurred during 2001, which are notyet deductible. The Company expects to be able to use these deferred tax assets to offset tax liabilities in the foreseeable future. In addition, the Company had no payable for income taxes recorded as of December 28, 2001, due primarily to the net losses incurred by the Company during 2001.

During 2001, the Company used funds totaling $208.2 million for the purchase of property, plant and equipment. The principal cash outlay in 2001 was for the construction and build-out of the Company�s new corporate headquarters in Naperville, Illinois, which totaled $82.6 million. Construction of thebuilding was completed and the Company began occupying the building during the fourth quarter of 2001. The remainder of the 2001 capital expenditures was mainly for the purchase of research and development equipment and manufacturing equipment to support the Company�s optical networkingproducts efforts.

The Company�s goodwill balance increased $114.7 million during 2001, as a result of the purchase of FNI for a total of $141.8 million, which includes substantially all of the product development milestone payments obligated under the purchase agreement (for more information, see Note 5, �BusinessCombinations�).

The balance of current liabilities at December 28, 2001, was $319.5 million compared with $412.3 million at December 29, 2000. The Company�s accounts payable balance was $63.5 million at the end of 2001 compared with $155.0 million at the end of 2000. The sharp decrease in accounts payable wasthe result of the lower level of business activity in 2001, along with the various cost reduction strategies implemented during the year.

The balance of total accrued liabilities was $100.9 million at December 28, 2001, compared with $164.0 million at December 29, 2000. The $63.1 million overall decrease in accrued liabilities was mainly due to a $59.3 million decline in accrued compensation charges during 2001. The driver behind thedrop in accrued compensation was the payment of bonuses and incentives linked to the Company�s 2000 Global Incentive Plan, which was accrued for during 2000, along with the absence of a 2001 bonus accrual.

At December 28, 2001, the Company had an accrual for 2001 restructuring charges totaling $180.1 million. The accrual balance consisted primarily of reserves for outstanding inventory purchase commitments, leased facility exit costs, employee severance and accrued fixed asset purchase commitments.The Company recorded $155.2 million of these reserves to accrued restructuring and other charges as the Company anticipates paying out the majority of these reserves during the next year. The remaining $24.9 million, which consisted solely of reserves for leased facility exit costs, was recorded to accruedlong-term restructuring charges.

The Company, through its normal course of business, enters into a variety of non-cancelable, non-returnable commitments for the purchase of inventory piece parts. These commitments are entered into at market rates and expire within the next year. In the event of a dramatic decline in sales, such as wasexperienced in 2001, the Company may incur excess inventory and subsequent losses as a result of these commitments. During 2001, the Company accrued $127.0 million related to outstanding purchase commitments as part of its restructuring actions. The Company does not anticipate having to recognizeany material losses on these contracts during 2002.

Overall, management believes its December 28, 2001 working capital level and, in particular, its total cash and short-term investments balance of $1,101.6 million, will be sufficient to meet the Company�s normal operating needs, both now and in the foreseeable future. During January 2002, the Companypaid approximately $300 million in cash for the purchase of Ocular Networks, Inc. Sufficient resources exist to support the Company�s operations either through currently available cash, cash generated from future operations, short-term or long-term financing or equity offerings.

The Company has never paid a cash dividend, and the current policy is to retain earnings to provide funds for the operation and expansion of the business. The Company does not anticipate paying a cash dividend in the foreseeable future.

Outlook

At December 28, 2001, the Company had limited ability to predict customer orders for 2002. Product backlog at the end of 2001 was approximately $172 million, down approximately 60% from the end of 2000. Substantially all of the backlog at December 28, 2001, is expected to be shipped in 2002.Tellabs considers backlog to be an indicator, but not the sole predictor, of future sales.

The Company anticipates 2002 gross margin as a percentage of sales to remain in the mid-40% range, as cost reductions resulting from the Company�s 2001 restructuring efforts are realized.The Company�s 2001 restructuring actions are expected to reduce the Company�s quarterly operating expenses to approximately $185.0 million by the first quarter of 2002, a 24% reduction from first quarter 2001 operating expense levels. At this point, total operating expenses are anticipated to be

approximately $785 million for the year. In 2002, the Company will adopt SFAS No. 142, �Goodwill and Other Intangible Assets,� which eliminates the periodic amortization of goodwill and replaces it with an annual impairment review. The implementation of this standard will result in a pre-tax expensereduction of approximately $30 million. Research and development expenditures are anticipated to be approximately $400 million, while selling, general and administrative expenditures are expected to be approximately $385 million.

Tellabs anticipates that its 2002 effective tax rate will be approximately 35%, primarily as a result of lower projected research and development tax credits, due to an overall reduction in research and development spending, combined with a change in the worldwide earnings mix. The Company willcontinue to focus on global tax minimization efforts.

Capital expenditures associated with property, plant and equipment, software and prototypes in 2002 are expected to be approximately $150 million. It is anticipated that 2002 working capital requirements will be met by funds currently available and funds generated by future earnings.Tellabs believes that the formation of business relationships with compatible organizations is important to future growth because it enables the Company to share in the development of new markets, products and technologies. Equally important, strategic business relationships can shorten the time it takes

to bring new products and solutions to market. It is for these reasons that Tellabs will continue to pursue the establishment of such relationships.

Forward-Looking Statements

This Management�s Discussion and Analysis and other sections of this Annual Report to Shareholders contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. These statements reflect management�s expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives andexpectations. The words �anticipate,� �believe,� �estimate,� �expect,� �plan,� �intend,� �likely,� �will,� �should� and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and otherfactors that may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include,but are not limited to: economic changes impacting the telecommunications industry; new product acceptance; product demand and industry capacity; competitive products and pricing; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patentsand technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment; facility construction and start-ups; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, andexpenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company�s filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 to Form 10-Q for the quarterly period ended June29, 2001, filed with SEC on August 9, 2001. The Company�s actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements indetermining whether to buy, sell or hold any of the Company�s securities. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.

Management Statement of Financial Responsibility

The financial statements of Tellabs, Inc. and Subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles. In the opinion of management, the financial statements set forth a fair presentation of the consolidated financial condition of Tellabs,Inc., and Subsidiaries at December 28, 2001, and December 29, 2000, and the consolidated results of its operations for the years ended December 28, 2001, December 29, 2000, and December 31, 1999.

The Company maintains accounting systems and related internal controls which, in the opinion of management, provide reasonable assurances that transactions are executed in accordance with management�s authorization, that financial statements are prepared in accordance with generally acceptedaccounting principles, and that assets are properly accounted for and safeguarded.

Ethical decision-making is fundamental to the Company�s management philosophy. Management recognizes its responsibility for fostering a strong ethical climate so that the Company�s affairs are conducted to the highest standards of personal and corporate conduct. Employee awareness of theseobjectives is achieved through key written policy statements and training.

The Board of Directors has appointed three of its non-employee members as an Audit Committee. This committee meets periodically with management and the independent auditors, who have free access to this committee without management present, to discuss the results of their audit work and theirevaluation of the internal control structure and the quality of financial reporting.

/s Michael J. BirckMichael J. BirckChairman of the Board

/s Richard C. NotebaertRichard C. NotebaertPresident and Chief Executive Officer

/s Joan E. RyanJoan E. RyanExecutive Vice President and Chief Financial Officer

January 22, 2002

Report of Independent Auditors

We have audited the accompanying consolidated balance sheets of Tellabs, Inc., and Subsidiaries as of December 28, 2001 and December 29, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 28, 2001.These financial statements are the responsibility of the Company�s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tellabs, Inc., and Subsidiaries at December 28, 2001 and December 29, 2000, and the consolidated results of their operations and their consolidated cash flows for each ofthe three years in the period ended December 28, 2001, in conformity with accounting principles generally accepted in the United States.

As discussed in Notes 2 and 4 to the financial statements, in 2000 the Company changed its method of revenue recognition.

/s Ernst & Young LLPErnst & Young LLPChicago, IllinoisJanuary 22, 2002

Consolidated Statements of Operations

(In thousands, except per-share data)

YearEnded12/28/01

YearEnded12/29/00

YearEnded12/31/99

Net SalesProduct $ 1,872,224 $ 3,110,731 $ 2,175,503Services and Other 327,523 276,704 146,867

2,199,747 3,387,435 2,322,370Cost of Sales

Product 1,167,138 1,288,614 759,921Services and Other 269,410 263,435 180,162

1,436,548 1,552,049 940,083

Gross Profit 763,199 1,835,386 1,382,287

Operating expenses



Marketing 248,962 244,885 197,201Research and development 425,461 415,237 312,287General and administrative 151,331 162,871 131,926Restructuring and other expenses 192,254 � �Goodwill amortization 24,583 11,674 7,106Merger costs �� 5,760 1,929

1,042,591 840,427 650,449

Operating Profit (Loss) (279,392) 994,959 731,838Other income (expense)

Interest income 46,874 56,135 35,548Interest expense (509) (634) (579)Other (11,728) 58,966 35,313

34,637 114,467 70,282Earnings (Loss) Before Income Taxes and

Cumulative Effect of Change inAccounting Principle (244,755) 1,109,426 802,120

Income tax expense (benefit) (62,779) 349,469 252,457Earnings (Loss) Before Cumulative Effect

of Change in Accounting Principle (181,976) 759,957 549,663Cumulative effect of change in accounting

principle (net of tax of $13,409) �� (29,161) �

Net Earnings (Loss) $ (181,976) $ 730,796 $ 549,663

Earnings (Loss) per Share BeforeCumulative Effect of Change inAccounting Principle

Basic $ (0.44) $ 1.86 $ 1.36Diluted $ (0.44) $ 1.82 $ 1.32

Cumulative Effect of Change inAccounting Principle per Share

Basic $ �� $ (0.07) $ �Diluted $ �� $ (0.07) $ �

Earnings (Loss) per ShareBasic $ (0.44) $ 1.79 $ 1.36Diluted $ (0.44) $ 1.75 $ 1.32

Average number of common sharesoutstanding 409,569 409,425 404,872

Average number of common sharesoutstanding, assuming dilution 409,569 418,385 417,041

Pro forma financial information*Net Earnings $ 759,957 $ 552,365

Earnings per ShareBasic $ 1.86 $ 1.36Diluted $ 1.82 $ 1.32*

* Assumes the cumulative effect of the change in accounting principle was applied retroactively to all periods presented.The accompanying notes are an integral part of these statements.

Consolidated Balance Sheets

(In thousands, except share amounts) 12/28/01 12/29/00ASSETSCurrent Assets

Cash and cash equivalents $ 701,917 $329,289Investments in marketable securities 399,713 693,058Accounts receivable, net of allowance of $57,261 and

$27,590 330,886 802,546Inventories

Raw materials 145,471 211,405Work in process 33,725 55,863Finished goods 149,855 160,987

329,051 428,255Deferred income taxes 138,166 29,773Income taxes 26,523 �Miscellaneous receivables and other current assets 18,347 39,558Total Current Assets 1,944,603 2,322,479

Property, Plant and EquipmentBuildings and improvements 315,608 243,007Equipment 516,182 482,220

831,790 725,227Accumulated depreciation (342,229) (296,134)

489,561 429,093Land 30,908 31,668

520,469 460,761Goodwill, Net 188,594 73,924Other Assets 212,119 215,903Total Assets $ 2,865,785 $3,073,067

LIABILITIES AND STOCKHOLDERS�� EQUITYCurrent Liabilities

Accounts payable $ 63,507 $155,006Accrued liabilities

Compensation 43,414 102,690Payroll and other taxes 8,860 17,829Accrued restructuring and other charges 155,154 �Other 48,610 43,526

Total accrued liabilities 256,038 164,045Income taxes �� 93,294Total Current Liabilities 319,545 412,345

Long-Term Debt 3,390 2,850Accrued Long-Term Restructuring Charges 24,919 �Other Long-Term Liabilities 30,950 24,221Deferred Income Taxes 21,366 6,067Stockholders�� Equity

Preferred stock: authorized 5,000,000 shares of$.01 par value; no shares issued andoutstanding ��

Common stock: authorized 1,000,000,000 shares of $.01par value; 413,497,100 and 411,182,947 shares issuedand outstanding, including treasury stock 4,135 4,112

Additional paid-in capital 494,603 441,909Treasury stock, at cost: 3,250,000 shares and

3,000,000 shares (129,598) (126,476)Accumulated other comprehensive income (loss)

Cumulative translation adjustment (164,415) (127,018)Unrealized net gains (losses) on available-for-sale

securities 4,250 (3,559)Total accumulated other comprehensive loss (160,165) (130,577)Retained earnings 2,256,640 2,438,616Total Stockholders�� Equity 2,465,615 2,627,584

Total Liabilities and Stockholders�� Equity $ 2,865,785 $3,073,067

The accompanying notes are an integral part of these statements.

Consolidated Statements of Stockholders�� Equity

(In thousands)CommonStock

AdditionalPaid-InCapital

TreasuryStock

&nbsp&nbspAccumulated&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbspOtherComprehensive&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbspIncome

RetainedEarnings Total

Balance at January 1, 1999 $2,023 $231,192 $� $11,216 $1,160,116 $1,404,547Comprehensive income:

Net earnings � � � � 549,663 549,663



Other comprehensive income,net of

tax:Unrealized holding gains on

marketable securitiesarising

during period (net ofdeferred

income taxes of $20,970) � � � 31,471 � 31,471Less: reclassification

adjustment forgains included in net

earnings (netof deferred income taxesof $6,549) � � � (10,022) � (10,022)

Net unrealized holding gainson

marketable securities � � � 21,449 � 21,449Foreign currency translation

adjustment � � � (73,708) � (73,708)Comprehensive income 497,404Stock options exercised 50 139,628 � � � 139,678Stock split 1,959 � � � (1,959) �

Stock retention programs � 538 � � � 538Employee stock awards � 558 � � � 558Issuance of common stock 48 4,732 � � � 4,780Balance at December 31, 1999 4,080 376,648 � (41,043) 1,707,820 2,047,505Comprehensive income:

Net earnings � � � � 730,796 730,796Other comprehensive income,

net oftax:

Unrealized holding losses onmarketable securities

arisingduring period (net of

deferredincome taxes of $16,036) � � � (23,508) � (23,508)

Less: reclassificationadjustment for

gains included in netearnings (net

of deferred income taxesof $14,604) � � � (21,923) � (21,923)

Net unrealized holding losseson

marketable securities � � � (45,431) � (45,431)Foreign currency translation

adjustment � � � (44,103) � (44,103)Comprehensive income 641,262Stock options exercised 32 58,114 � � � 58,146Stock retention programs � 999 � � � 999Employee stock awards � 849 � � � 849Stock compensation from acquired&nbsp&nbsp&nbsp&nbspcompany� 5,225 � � � 5,225Purchase of treasury stock � � (126,476) � � (126,476)Issuance of common stock � 74 � � � 74Balance at December 29, 2000 4,112 441,909 (126,476) (130,577) 2,438,616 2,627,584Comprehensive loss:

Net loss � � � � (181,976) (181,976)Other comprehensive income,

net oftax:

Unrealized holding gains onmarketable securities

arisingduring period (net of

deferredincome taxes of $2,322) � � � 3,455 � 3,455

Less: reclassificationadjustment for

losses included in netearnings (net

of deferred income taxesof $3,264) � � � 4,354 � 4,354

Net unrealized holding gainson

marketable securities � � � 7,809 � 7,809Foreign currency translation

adjustment � � � (37,397) � (37,397)Comprehensive loss (211,564)Stock options exercised 23 40,963 � � � 40,986Stock retention programs � 2,678 � � � 2,678Employee stock awards � 315 � � � 315Fair value of options issued inacquisition � 7,161 � � � 7,161Unearned compensation fromoptions

issued in acquisition � (1,429) � � � (1,429)Stock compensation from 2001

restructuring activities � 3,006 � � � 3,006Purchase of treasury stock � � (3,122) � � (3,122)Balance at December 28, 2001 $4,135 $494,603 $(129,598) $(160,165) $2,256,640 $2,465,615

The accompanying notes are an integral part of these statements.

Consolidated Statements of Cash Flow

(In thousands)

YearEnded12/28/01

YearEnded12/29/00

YearEnded12/31/99

Operating ActivitiesNet Earnings (Loss) $ (181,976) $ 730,796 $ 549,663Adjustments to reconcile net earnings (loss)

to net cash provided by operatingactivities:

Restructuring and other charges, net ofcash paid 384,211 � �

Depreciation and amortization 157,509 116,209 84,863Tax benefit associated with stock

option exercises 20,060 27,223 99,257Provision for doubtful accounts 41,979 19,184 2,025Deferred income taxes (94,902) 1,261 (5,460)Loss (gain) on investments 13,130 (58,756) (42,572)Merger costs �� 5,760 1,929Net changes in assets and liabilities,

net of effects from acquisitions:Accounts receivable 424,702 (225,219) (133,472)Inventories (27,273) (246,271) (42,977)Miscellaneous receivables and

other current assets 7,972 (18,931) (4,133)Long-term assets (65,627) (80,725) (76,265)Accounts payable (91,051) 45,206 43,192Accrued liabilities (56,233) 61,013 (968)Income taxes (120,016) 45,556 (25,093)Long-term liabilities 6,829 3,830 2,226

Net Cash Provided by Operating Activities 419,314 426,136 452,215Investing Activities



Acquisition of property, plant andequipment, net (208,241) (207,621) (99,455)

Payments for purchases of investments (424,033) (643,580) (666,556)Proceeds from sales and maturities

of investments 713,969 560,485 491,306Payments for acquisitions, net of

cash acquired (130,766) (535) (143,420)Net Cash Used for Investing Activities (49,071) (291,251) (418,125)Financing Activities

Proceeds from issuance of common stock 20,926 30,919 45,204Purchase of treasury stock (3,122) (126,476) �

Proceeds from notes payable 548 � 6,500Payments of notes payable �� (6,500) (499)

Net Cash Provided by (Used for) FinancingActivities 18,352 (102,057) 51,205Effect of Exchange Rate Changes on Cash (15,967) (14,092) (20,203)Net Increase in Cash and Cash Equivalents 372,628 18,736 65,092Cash and Cash Equivalents at Beginning of Year 329,289 310,553 245,461Cash and Cash Equivalents at End of Year $ 710,917 $ 329,289 $ 310,553Other Information

Interest paid $ 738 $ 347 $ 343Income taxes paid $ 151,021 $ 274,796 $ 182,277

The accompanying notes are an integral part of these statements.Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of BusinessOperating in one business segment, the Company and its Subsidiaries design, assemble, market and service a diverse line of communications equipment used in public and private networks worldwide.

Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its Subsidiaries. All significant intercompany balances and transactions have been eliminated.

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition,certain reclassifications have been made in the 1999 and 2000 consolidated financial statements to conform to the 2001 presentation.

Cash EquivalentsThe Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Fair Value of Financial InstrumentsThe Company�s financial instruments include cash and cash equivalents, marketable securities and long-term debt. The carrying value of the cash and cash equivalents and long-term debt approximates their estimated fair values based upon quoted market prices. The fair value of investments in marketablesecurities is estimated based on quotes from brokers or current rates offered for instruments with similar characteristics.

InventoriesInventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property, Plant and EquipmentProperty, plant and equipment is recorded at cost. Depreciation is computed using both the declining-balance and straight-line methods. Buildings are depreciated over 25 to 40 years, improvements over 7 years and equipment over 3 to 10 years.

Stock OptionsUnder the provisions of Statement of Financial Accounting Standards (�SFAS�) No. 123, �Accounting for Stock-Based Compensation,� the Company continues to apply Accounting Principles Board (�APB�) Opinion No. 25, �Accounting for Stock Issued to Employees,� and its related interpretations inaccounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan grants.

Income TaxesDeferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases at enacted tax rates when such amounts are expected to be realized or settled.

GoodwillOn an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of the net earnings generated by the related assets to determine that no impairment has occurred. Goodwill is amortized over terms ranging from7 to 20 years using the straight-line method. The accumulated amortization of goodwill is approximately $59,143,000 and $34,562,000 at December 28, 2001 and December 29, 2000, respectively. See Note 2, "New Accounting Pronouncements," for pending accounting change concerning goodwill.

Revenue RecognitionProduct revenue is recognized when all significant contractual obligations have been met, including the terms of the shipment, and collection of the resulting receivable is reasonably assured. Revenue for maintenance and support services is recognized ratably over the contract period. All other servicerevenue is recognized upon completion.

Earnings Per ShareIn accordance with SFAS No. 128, �Earnings Per Share,� earnings per share are based on both the weighted-average number of shares and the weighted-average shares adjusted for assumed conversions of stock options. if dilutive. (See Note 13, �Earnings Per Share.�)

Foreign Currency TranslationThe financial statements of the Company�s subsidiaries are generally measured using the local currency as the functional currency. For these subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date. The effect of translating a subsidiary�s stockholders� equity inU.S. dollars is recorded as a cumulative translation adjustment in the Consolidated Balance Sheets.

Foreign ExchangeForeign currency transaction gains and losses resulting from changes in exchange rates are recognized in �Other income (expense).� Net losses of $2,170,000, $2,677,000 and $1,073,000 were recorded in 2001, 2000 and 1999, respectively.

2. New Accounting Pronouncements

The Company adopted the Financial Accounting Standards Board (�FASB�) SFAS No. 133, �Accounting for Derivative Instruments and Hedging Activities,� during the first quarter of 2001. For more information see Note 4, �Change in Accounting Principle.�During the fourth quarter of 2000, Tellabs adopted the SEC�s Staff Accounting Bulletin (�SAB�) No. 101, �Revenue Recognition in Financial Statements.� For a complete discussion of the implementation effects on Tellabs� consolidated results of operations, financial position and cash flows see Note 4,�Change in Accounting Principle.�

In December 2000, the Company adopted the Emerging Issues Task Force (�EITF�) Issue 00-10, �Accounting for Shipping and Handling Fees and Costs.� Issue 00-10 requires companies to recognize revenue for the amounts billed to customers for shipping and handling charges. Previous to this, theCompany recorded these billings as a reduction of cost of sales. Sales and cost of sales were not restated for any of the periods presented as such amounts are not significant.

In June 2001, the FASB approved SFAS No. 141, �Business Combinations,� and SFAS No. 142, �Goodwill and Other Intangible Assets,� effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001, and eliminates the pooling-of-interests method of accounting for future acquisitions. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets. SFAS 142 eliminates the amortization of goodwill and intangible assets withindefinite useful lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

Tellabs has followed the business combination guidance set forth in SFAS No. 141 for business combinations initiated after June 30, 2001. The nonamortization provisions of SFAS No. 142 will be implemented during the first quarter of 2002. The Company expects an increase of approximately $30million in pre-tax earnings during 2002 as a result of this accounting change. The Company will perform the required transitional impairment test of goodwill during the first quarter of 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of theCompany. Any impairment charge resulting from this test will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002.

In October 2001, the FASB issued SFAS No. 144, �Accounting for the Impairment or Disposal of Long-Lived Assets.� SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. It provides a single accounting model for long-lived assets to be disposed of and replaces SFAS No. 121,�Accoounting for the Impairment of Long-Lived Assets to be Disposal of.� The effect of adoption of this standard on the Company's results of operations and financial position is being evaluated.

3. Restructuring and Other Charges

In April 2001, August 2001 and November 2001, the Company�s management and Board of Directors approved plans to restructure its business operations. The Company�s restructuring efforts included termination of the SALIX and NetCore next-generation switching effort, discontinuation of thedevelopment of the TITAN 6700 Optical Transport Switch, strategic realignment of worldwide manufacturing capacity and related workforce reductions, reduction of excess inventories and related purchase commitments, and a consolidation of the Company�s facilities. These steps were undertaken to bothrealign the Company�s cost structure with the lower anticipated business and industry outlook and to focus the Company�s resources on the metro optical networking and business services markets.

Below is an analysis and discussion of the restructuring and other charges by major income statement classification for all of the Company�s restructuring programs:

IncomeStatementClassification

Descriptionof Charges

April2001

August2001

November2001

Non-CashActivity

CashActivity

Balance atDecember28, 2001

(Amounts in&nbsp&nbspthousands)&nbsp &nbsp &nbsp &nbsp &nbsp &nbsp &nbspNet Product&nbsp&nbspSales

Reversal of&nbsp&nbspSALIX&nbsp&nbsprevenue $&nbsp&nbsp&nbsp6,224$&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp�$&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp�$&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(195)$&nbsp&nbsp(6,029)$&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp�

Product Cost&nbsp&nbspof Sales

Inventory&nbsp&nbspwrite-offs 90,731 � 29,563 (120,294) � �

&nbspExcess purchase&nbsp&nbspcommitments 78,025 � 48,950 106 (32,506) 94,575

&nbspOther asset&nbsp&nbspwrite-offs 2,902 � � (2,902) � �

Restructuring Severance and&nbsp&nbsprelated&nbsp&nbspexpenses 6,891 18,323 21,725 (820) (19,747) 26,372

&nbsp

Consolidation of&nbsp&nbspexcess leased&nbsp&nbspfacilities 38,450 11,262 9,794 � (6,157) 53,349

&nbsp

Disposal of&nbsp&nbspproperty, plant&nbsp&nbspand equipment27,718 16,983 10,927 (52,189) � 3,439

&nbspOther asset&nbsp&nbspwrite-offs 10,698 3,723 15,760 (27,843) � 2,338

&nbsp &nbsp $261,639 $50,291 $136,719 $(204,137) $(64,439) $180,073

SALIX revenue reversalDuring the second quarter of 2001, the Company reversed previously recognized sales totaling $6,224,000 related to the SALIX 7750 product. The Company has refunded customers $6,029,000 related to SALIX product returns.

Inventory write-offs and excess purchase commitment accrualIncluded in product cost of sales were charges totaling $247,269,000, related to non-cancelable inventory purchase commitments and write-offs of excess and obsolete inventory. These charges arose from a build-up in CABLESPAN 2300 residential service units that will be superseded by new, upgradedunits; the termination of the SALIX and NetCore next-generation switching effort; the discontinuance of the TITAN 6700 OTS; and the identification of various components and common piece parts that would no longer be utilized due to the lower forecasted product demand.



The inventory write-offs were recorded as a reduction to inventory, while the estimated costs of settling the purchase commitments were recorded to accrued restructuring and other charges. The Company anticipates settling the majority of the remaining excess purchase commitments in 2002.

Severance and related expensesOverall, the Company's restructuring efforts are expected to result in a reduction of approximately 2,550 employees throughout the world, by the end of the first quarter of 2002, through a combination of layoffs and limited voluntary early retirement. As a result, the Company recorded charges of$46,939,000 for severance pay and related fringe benefits and compensation expense that resulted from granting extended vesting terms to early retirees.

As of December 28, 2001, approximately $20,567,000 has been charged against this reserve, principally for cash payments of severance pay to approximately 1,500 employees. The Company anticipates paying out the majority of the remaining severance costs in the first half of 2002.

Consolidation of excess leased facilitiesDuring 2001, the Company recorded charges totaling $59,506,000 related to exit costs associated with the consolidation of excess leased facilities. The charges related primarily to lease cancellation and non-cancelable lease costs to be incurred with the closure of the SALIX and NetCore facilities; theclosure of a manufacturing facility in Drogheda, Ireland; the Company's decision not to open its research and development facility in Chelmsford, Massachusetts; the closure of certain small sales offices around the world and the consolidation of a variety of leased buildings that would no longer be needed.

Of the charges, $24,919,000 was considered long-term in nature and was recorded to accrued long-term restructuring charges. The remainder of the charges is expected to be paid out during 2002 and was recorded to accrued restructuring and other charges. The Company anticipates that these liabilitieswill be substantially paid by 2003.

Disposal of property, plant and equipment and write-off of other assetsThe Company recorded a total of $88,711,000 related to the disposal of property, plant and equipment and other long-term assets. Property, plant and equipment consisted primarily of leasehold improvements, production equipment, lab and data equipment and furniture associated with the unopened facilityin Chelmsford, the closure of the manufacturing facility in Drogheda, Ireland and an additional manufacturing facility closure in Round Rock, Texas.

Other assets written-off or disposed of consisted of capitalized TITAN 6700 OTS prototypes, prototypes related to the next-generation switching product effort, write-offs of prepaid royalties and licenses related to the SALIX product line, and government grants to be repaid during 2002.

4. Change in Accounting Principle

The Company adopted SFAS No. 133, �Accounting for Derivative Instruments and Hedging Activities,� during the first quarter of 2001. SFAS No. 133 establishes accounting and reporting standards that require companies to record all derivative instruments on the balance sheet at their fair value. Changesin the derivatives' fair value are to be reported in earnings or other comprehensive income, as appropriate. Adoption of SFAS No. 133 had no significant impact on Tellabs' consolidated financial statements. For more information, see Note 7, �Financial Instruments.�

In the fourth quarter of 2000, the Company changed its method of accounting for revenue recognition in accordance with SAB 101, �Revenue Recognition in Financial Statements,� retroactive to January 1, 2000. This change aligns the revenue recognition policy with certain customer-specific contractualprovisions.

Adoption of SAB 101 was recorded as a change in accounting method by reporting the cumulative effect of the change to prior periods in the first period of 2000. The cumulative effect of the change resulted in a charge to earnings of $29,161,000 (net of income taxes of $13,409,000), for the year endedDecember 29, 2000. The total revenue included in the change was $58,820,000. The effect on 2000 was to increase earnings before the cumulative effect of the change in accounting principle by $20,909,000 ($0.05 per share).

5. Business Combinations

In Febrary 2001, the Company acquired Future Networks, Inc. (�FNI�), a leader in standards-based voice and cable modem technology, for approximately $141,757,000. The aggregate purchase price consisted of cash paid to the former shareholders of FNI of approximately $94,896,000 at the acquisitiondate, cash paid to the former shareholders of approximately $41,742,000 during 2001 upon achievement of certain product development milestones by FNI, the value of FNI employee stock options exchanged for Tellabs stock options of approximately $4,930,000 and other acquisition costs.

The FNI acquisition was accounted for as a purchase, and accordingly, the results of operations of the acquired business were included in the consolidated operating results of Tellabs from the date of acquisition.The allocation of purchase price was as follows:

(In thousands)

Fair value of assets acquired $11,334Cost in excess of fair value 140,795Liabilities assumed (10,372)Purchase price $141,757

The total amount allocated to cost in excess of fair value is being amortized using the straight-line method over a period of seven years. Pro forma combined operating results prepared assuming the acquisition had occurred at the beginning of the year are not being presented since they would not differmaterially from reported results.

In February 2000, the Company acquired SALIX Technologies, Inc. (�SALIX�), a developer of next-generation switching solutions that enable service providers to offer next-generation, converged services over any network infrastructure, in a transaction accounted for as a pooling of interests. TheCompany issued approximately 3,784,000 shares of its common stock in exchange for all the outstanding common and preferred shares of SALIX. During the first quarter of 2000, the Company recognized a pre-tax charge of $5,760,000 for costs related to the SALIX acquisition.

In August 1999, the Company acquired NetCore Systems, Inc. (�NetCore�) a developer of carrier-class IP routing and ATM switching solutions, in a transaction accounted for as a pooling of interests. The Company issued approximately 8,868,000 shares of its common stock in exchange for all theoutstanding common and preferred shares of NetCore. In 1999, the Company recognized a pre-tax charge of $1,929,000 for costs related to the NetCore merger.

In July 1999, the Company acquired Alcatel�s DSC Communications businesses in Europe, now known as Tellabs Denmark. The acquisition covered DSC Communications� European headquarters in Denmark, along with its business operations in Drogheda, Ireland; sales and support offices in England,India and Poland; and an interest in FIBCOM India Ltd., a joint venture with Indian Telephone Industries Ltd. in India. Tellabs Denmark is a provider of managed, high-speed transport solutions that operate in synchronous digital hierarchy and dense wavelength division multiplexing environments. Theacquisition was accounted for as a purchase; and accordingly, the results of operations of the acquired businesses were included in the consolidated operating results of Tellabs from the date of acquisition.

The allocation of purchase price was as follows:

(In thousands)

Fair value of assets acquired $136,345Cost in excess of fair value 9,845Liabilities assumed (39,799)Cash paid for acquisition $106,391

The total amount allocated to costs in excess of fair value is being amortized using the straight-line method over a period of seven years. Included in the assets acquired are $25,000,000 of identified intangible assets, which also are being amortized using the straight-line basis over a period of seven years.Pro forma combined operating results prepared assuming the acquisition had occurred at the beginning of the year are not being presented since they would not differ materially from reported results.

The Company has restated all prior consolidated financial statements presented to include the combined operating results, financial position and cash flows of SALIX and NetCore as if they were always part of the Company.Prior to its acquisition, SALIX operated on a June 30th fiscal year. Restated consolidated financial statements for the year ended December 31, 1999, include the calendar results of operations, financial position and cash flows for SALIX. Restated financial statements for the fiscal year ended January 1,

1999, include SALIX consolidated statements of operations for the fiscal year ended June 30, 1999, and the balance sheets at December 31, 1998. The effect of the 1998 restatement is the double counting of the loss for the six-month period ending June 30, 1999. The SALIX results of operations from thissix-month period were as follows:

(In thousands)

Six FiscalMonthsEnded6/30/99

Net Sales $1,036Gross Profit $338Operating Loss $ (5,062)Net Loss $ (3,295)

The loss from this six-month period has been reported as an adjustment to retained earnings. Restated financial statements for the fiscal year ending January 2, 1998, include SALIX consolidated statements for the fiscal year ended June 30, 1998.No material adjustments were recorded to conform the accounting policies of Tellabs, SALIX and NetCore. Certain reclassifications and adjustments were made to conform the Tellabs, SALIX and NetCore presentations, including the conversion of SALIX and NetCore redeemable convertible preferred

shares to common shares outstanding, for all periods presented, at the applicable exchange rates, and the reclassification of costs related to the generation of customer service revenue from �Operating Expenses� to �Cost of Sales.�The following table shows the historical results of operations of Tellabs and the restated combination of SALIX and NetCore for the periods prior to the consummation of the merger between the companies:

(In thousands)

YearEnded12/28/01

YearEnded12/29/00

YearEnded12/31/99

Revenue:Tellabs $3,387,166 $2,319,498SALIX 269* 2,872NetCore � �

Consolidated total, as restated $3,387,435 $2,322,370Net earnings (loss):

Tellabs $732,467 $568,212SALIX (2,532)* (14,125)NetCore � (12,022)**Reversal of SALIX Deferred Tax

Valuation Allowance 861 4,668Reversal of NetCore Deferred Tax

Valuation Allowance � 2,930Consolidated total, as restated $730,796 $549,663

* Represents 2000 revenues and loss for SALIX prior to the acquisition; SALIX�s 2000 revenues and lossafter the acquisition are included in Tellabs� consolidated operating results.** Represents 1999 loss for NetCore prior to the acquisition; NetCore�s 1999 loss after the acquisition isincluded in Tellabs� consolidated operating results.

6. Investments

Available-for-sale marketable securities are accounted for at market prices with the unrealized gain or loss, net of deferred income taxes, shown as a separate component of stockholders� equity. At December 28, 2001, and December 29, 2000, they consisted of the following:

(In thousands)Amortized

CostUnrealizedGain/(Loss)

MarketValue

2001State and municipal securities $135,832 $ 1,871 $ 137,703Preferred and common stocks 93,708 2,594 96,302U.S. government and agency debtobligations 65,870 2,113 67,983Corporate debt obligations 55,835 650 56,485Foreign bank obligations 41,315 (75) 41,240

$392,560 $ 7,153 $ 399,7132000State and municipal securities $278,553 $ (1,645) $ 276,908Preferred and common stocks 147,276 (4,699) 142,577U.S. government and agency debtobligations 118,097 (460) 117,637Corporate debt obligations 103,707 312 104,019Foreign bank obligations 51,445 472 51,917

$699,078 $ (6,020) $ 693,058

In 2001, the Company determined that the decline in market value it had experienced in certain preferred and common stock holdings was other than temporary in nature. In accordance with SFAS No. 115, �Accounting for Certain Investments in Debt and Equity Securities,� the Company recognized apre-tax loss totaling $25,926,000 related to the impairment and subsequent sale of these investments. During 2001, the Company also sold stock of a certain equity investment for a pre-tax gain of $12,824,000. In 2000, the Company sold stock in this same investment, of which approximately 40% was



covered by various market price collars, for a pre-tax gain of $39,785,000. Also in 2000, the Company recognized a pre-tax gain of $13,215,000 from distributions from certain of its technology investments.The Company also maintains investments in start-up technology companies and partnerships that invest in start-up technology companies. These investments are recorded in �Other Assets� at cost, which approximates fair market value. At December 28, 2001 and December 29, 2000 these investments

totaled $36,012,000 and $34,688,000, respectively.

7. Financial Instruments

The Company conducts business on a global basis in several major currencies and is subject to the risks associated with fluctuating foreign exchange rates. In response to this, the Company developed a foreign currency exposure management policy with the objective of mitigating financial exposure tochanging foreign exchange rates resulting from nonfunctional currency receivables and payables that are expected to be settled in one year or less. The Company utilizes derivatives, primarily foreign currency forward contracts, to manage its foreign currency exposure. The Company does not engage inhedging specific individual transactions, but rather uses derivatives to manage overall exposure levels for a specific currency. Gains and losses related to these derivatives are recorded to the consolidated statement of operations each month.

The Company�s policy is to hedge 90% of the calculated exposure. Foreign currency forward contracts are executed weekly with the final contracts for each period executed one week before the end of the period. As a result of this timing additional nonfunctional foreign currency transactions can occurduring the last week of the period that could cause the Company�s hedge percentage at the end of the period to be greater or less than the 90% target. The Company enters into forward exchange contracts only to the extent necessary to meet its overall goal of minimizing nonfunctional foreign currencyexposures. The Company does not enter into hedging transactions for speculative purposes. The Company's foreign currency exposure management policy and program remained unchanged during 1999, 2000 and 2001, and no significant changes are currently planned.

In accordance with SFAS No. 133, all forward exchange contracts are recorded on the balance sheet at fair value. Forward exchange contracts receivable are included in other current assets, while forward exchange contracts payable are included as part of accrued liabilities in the consolidated condensedbalance sheet. Changes in the fair value of these instruments are included in earnings, as part of �Other income (expense),� in the current period. Net losses on forward exchange contracts were $4,652,000, $1,826,000 and $5,889,000 for 2001, 2000 and 1999, respectively. The Company's current hedgingpractices do not qualify for special hedge accounting treatment as prescribed in SFAS No. 133 since hedges of existing assets or liabilities that will be remeasured with changes in fair value reported currently in earnings are specifically excluded.

Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in the foreign currency exchange rates, which is expected to be partially offset by movements in the underlyingassets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the Company�s derivative transactions. The Company does not believe there is a significant credit risk because the counterparties are all large international financial institutions with high credit ratings.In addition, the Company also limits the amount of agreements entered into with any one financial institution in order to mitigate credit risk.

The table that follows presents a summary of the Company�s underlying foreign currency exposure, along with the notional and fair values of the related foreign currency forward contracts being utilized at December 28, 2001 and December 29, 2000. The principal currencies currently being hedged bythe Company are the British pound, Danish krone Euro and U.S. dollar. The notional amounts shown are the U.S dollar values of the agreed-upon amounts in each foreign currency that will be delivered to a third party on the agreed-upon date.

(In thousands)


NotionalValue ofForwardContractMaturing in2002

Fair Value ofForwardContract at 12/28/01

Forward contracts atDecember 28, 2001:

Related forward contracts to sellforeign currencies for Euro $&nbsp93,412 $&nbsp85,518 $&nbsp85,499

Related forward contracts to buyforeign currencies for Euro 930 507 490

Related forward contracts to sellforeign currencies for Danishkrone 7,369 6,875 6,875

Related forward contracts to sellforeign currencies for Britishpound 14,643 9,967 9,778

Related forward contracts to buyforeign currencies for U.S. dollar 431 246 247

Related forward contracts to sellforeign currencies for U.S. dollar 7,064 7,150 7,080

Total $123,849 $110,263 $109,969

(In thousands)


NotionalValue ofForwardContractMaturing in2001

Fair Value ofForwardContract at 12/29/00

Forward contracts at December 29,2000:Related forward contracts to sell

foreign currencies for Euro $111,374 $112,518 $112,574Related forward contracts to sell

foreign currencies for Danishkrone 16,054 11,732 11,733

Related forward contracts to sellforeign currencies for Britishpound 3,581 3,141 3,143

Related forward contracts to sellforeign currencies for U.S. dollar 11,635 11,141 11,182

Total $142,644 $138,532 $138,632

8. Employee Benefit and Retirement Plan

The Company maintains a defined-contribution 401(k) savings plan (�401(k) plan�) for the benefit of eligible employees. Under the 401(k) plan, a participant may elect to defer a portion of annual compensation. Matching contributions equal to the first 3% of annual compensation were made by theCompany for all eligible participants. The Company�s Board of Directors may authorize discretionary contributions to the 401(k) plan, for which no amounts were authorized in 2001, 2000 or 1999. Contributions to the 401(k) plan are immediately vested in plan participants� accounts. The Companymaintains similar plans for the benefit of eligible employees at its Finland, Ireland and Denmark subsidiaries.

The Company maintains defined-contribution retirement and profit-sharing plans for the benefit of eligible employees. Under both plans, the Company�s contributions totaled 5% of eligible annual compensation for each eligible participant in 2001, 2000 and 1999. No part of the contributions is vesteduntil after a service period of five years, at which time the participant is fully vested. The Company�s contributions to the profit sharing plan, which were 0.5% of eligible annual compensation in 2001, 2000 and 1999, are maintained as part of the 401(k) plan.

Company contributions to the 401(k) savings and profit-sharing plans were $17,202,000, $15,436,000 and $12,665,000 for 2001, 2000 and 1999, respectively. Company contributions to the retirement plan were $14,445,000, $9,421,000 and $9,135,000 for 2001, 2000 and 1999, respectively.The Company maintains a defined-benefit retiree medical plan. Under the plan, which was implemented in 1999, the Company provides qualified retirees with a subsidy to supplement their medical costs and allows the retirees to participate in the Company-sponsored healthcare plan. The Company

records, as part of operating expenses, the estimated current costs of the plan. In 2001, 2000 and 1999, those costs were $2,218,000, $1,857,000 and $1,293,000, respectively.The Company provides a deferred compensation plan that permits certain officers and management employees to defer portions of their compensation. The liabilities for the deferred salaries plus interest are included in �Other Long-Term Liabilities.�The Company maintains an employee stock purchase plan. Under the plan, employees elect to withhold a portion of their compensation to purchase the Company�s common stock at fair market value. The Company matches 15% of each employee�s withholdings. Compensation expense is recognized for

the amount that the Company contributes to the plan through its matching of participant withholdings.The Company has a program to award shares of the Company�s common stock to employees in recognition of their past service. Each full-time employee who has worked for a continuous 5-, 10-, 15-, 20- or 25-year period is awarded 10, 15, 25, 50 or 75 shares, respectively. When an employee stock

award is granted, compensation expense is charged for the fair market value of the shares issued.The Company has a number of employee retention programs under which certain employees, primarily as a result of the Company�s acquisitions, are entitled to a specific number of shares of the Company�s stock over a one- or two-year vesting period.

9. Stock Options

At December 28, 2001, the Company had 12 stock-based compensation plans. Under these plans, the Company typically grants options to purchase the Company�s common stock at no less than 100% of the market price on the date the option is granted. Options generally become exercisable on acumulative basis at a rate of 25% on each of the first through fourth anniversaries of the grant date and have a maximum term of five, seven and ten years. A total of 150,844,288 shares were authorized for issuance at December 28, 2001. Certain plans also provide for the granting of stock appreciation rights(SARs) in conjunction with, or independently of, the options under the plans. The SARs are typically assigned five or ten year terms. At December 28, 2001, there were 84,528 SARs outstanding under the plans. At December 28, 2001, the exercise prices of the Company�s outstanding SARs ranged from$14.31 to $70.63.

The Company applies APB Opinion No. 25 and its related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan grants. Had compensation cost for the Company�s stock-based compensation plans been determined using the fairvalue at the grant dates for awards under those plans consistent with the method required by SFAS No. 123, the Company�s net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following chart:

(In thousands, exceptper-share data) 2001 2000 1999

Net earnings (loss)As reported $(181,976) $730,796 $549,663Pro forma $(303,421) $667,023 $513,053

Earnings (loss) per&nbsp&nbspcommon share

As reported $ (0.44) $ 1.79 $ 1.36Pro forma $ (0.74) $ 1.63 $ 1.27

Earnings (loss) per&nbsp&nbspcommon share,&nbsp&nbspassuming dilution

As reported $ (0.44) $ 1.75 $ 1.32Pro forma $ (0.74) $ 1.59 $ 1.23

These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2001, 2000 and 1999:

2001 2000 1999Expected volatility 64.8% 62.6% 67.6%Risk-free interest rate4.9% 4.9% 5.4%Expected life 7.0 years 5.1 years 4.1 yearsExpected dividendyield 0.0% 0.0% 0.0%

A summary of the status of the Company�s options plans as of December 28, 2001, December 29, 2000 and December 31, 1999, and of changes during the years ending on these dates is presented in the following chart:2001 2000 1999

Shares

WeightedAverageExercisePrice Shares


WeightedAverageExercisePrice

Outstanding �&nbsp&nbspbeginningof year 26,203,871 $ 34.31 22,434,661 $ 21.44 25,564,136 $ 11.70

Granted 17,890,236 $ 25.81 9,208,639 $ 58.66 4,266,694 $ 54.14



Exercised (2,265,958)$&nbsp&nbsp&nbsp9.24(3,185,008)$&nbsp&nbsp&nbsp9.71(6,548,659)$&nbsp&nbsp&nbsp6.19Forfeited (3,901,945)$ 42.61 (2,254,421)$ 40.40 (847,510) $ 21.79

&nbsp &nbsp &nbspOutstanding �&nbsp&nbspend ofyear 37,926,204 $ 30.95 26,203,871 $ 34.31 22,434,661 $ 21.44

&nbsp &nbsp &nbsp

Exercisable at end&nbsp&nbspof year 14,307,655 12,325,391 10,982,737Available for grant 29,780,548 5,761,240 13,302,987Weighted-average&nbsp&nbspfair valueof&nbsp&nbspoptionsgranted&nbsp&nbspduringthe year $ 16.85 $ 33.88 $ 34.05

Options Outstanding and Exercisable as of December 28, 2001, by Price Range:

Outstanding Exercisable

Range ofExcercise Prices Shares

WeightedAverageRemainingContractualLife


WeightedAverageExercisePrice

$0.11�$7.06 2,757,357 1.8 $2.54 2,757,357 $2.54$7.06�$14.13 796,325 4.1 $8.83 673,329 $8.63$14.13�$21.19 17,782,987 8.0 $16.46 5,250,151 $15.88$21.19�$28.25 1,929,248 5.1 $25.34 1,908,859 $25.32$28.25�$35.31 327,852 7.4 $32.81 114,310 $33.22$35.31�$42.38 482,620 8.4 $38.99 64,873 $36.53$42.38�$49.44 697,863 7.7 $47.01 234,193 $47.14$49.44�$56.50 5,478,000 8.4 $50.98 634,357 $53.01$56.50�$63.56 7,284,027 8.0 $61.68 2,542,500 $61.61$63.56�$70.63 389,925 7.9 $69.41 127,726 $69.35$0.11�$70.63 37,926,204 7.4 $30.95 14,307,655 $25.22

10. Income Taxes

Components of the Company's earnings (loss) before income taxes were as follows:

(In thousands)

YearEnded12/28/01

YearEnded12/29/00

YearEnded12/31/99

Domestic source $ (263,406) $ 918,991 $ 561,805Foreign source 18,651 190,435 240,315Total $ (244,755) $ 1,109,426$ 802,120

The provision for income tax expense (benefit) consisted of the following:

Current:Federal $ 3,884 $ 258,683 $ 181,663State (1,826) 34,214 26,854Foreign 33,680 41,902 49,400

35,738 334,799 257,917Deferred:

Federal (95,119) 13,818 (9,332)State and foreign (3,398) 852 3,872

(98,517) 14,670 (5,460)Total Provision $ (62,779) $ 349,469 $ 252,457

Deferred tax assets (liabilities) for 2001 and 2000 are comprised of the following:

(In thousands)Balance at12/28/01

Balance at12/29/00

Deferred Tax AssetsNOL and research and development

& credit carryforwards $ 72,565 $ 37,296Inventory reserves 13,649 14,280Accrued liabilities 19,410 6,467Deferred compensation plan 4,145 6,438Unrealized loss on marketable securities � 4,666Deferred employee benefit expenses 4,369 3,589Restructuring accruals 87,982 �Other 9,833 10,984Gross deferred tax assets 211,953 83,720

Deferred Tax LiabilitiesAmortizable intangibles (3,724) (5,107)Depreciation (2,297) (3,361)Unrealized gain on marketable securities (2,849) �Other (669) (7,701)Gross deferred tax liabilities (9,539) (16,169)Valuation allowance (85,614) (43,845)

Net Deferred Tax Asset $ 116,800 $ 23,706

Federal income taxes at the statutory rate were reconciled with the Company's income tax provision as follows:

(In percentages)

YearEnded12/28/01

YearEnded12/29/00

YearEnded12/31/99

Statutory U.S. income tax (benefit) rate (35.0)% 35.0% 35.0%State income tax, net of federal benefits (2.4) 1.9 2.1Research and development credit (5.1) (2.2) (1.6)Foreign earnings taxed at different rates 15.2 (1.6) (2.7)Charitable contribution � (0.4) �Benefit attributable to foreign sales&nbsp&nbspcorporation (0.8) (0.3) (0.3)Tax benefits associated with merger of&nbsp&nbsp Finland subsidiaries � � (0.3)Other - net 2.5 (0.9) (0.7)Effective Income Tax (Benefit) Rate (25.6)% 31.5% 31.5%

The net deferred income tax asset increased to $116,800,000 at December 28, 2001, from $23,706,000 at December 29, 2000. The change in the net deferred tax balance is primarily attributable to the 2001 restructuring accruals and the mark-to-market adjustment for investments in accordance with SFAS115, �Accounting for Certain Investments in Debt and Equity Securities.�

The Company has carryforward net operating losses and research and development credits associated with the 2001 acquisition of Future Networks, Inc. and prior domestic acquisitions. As of December 28, 2001, the balances in these deferred tax assets totaled approximately $8,950,000. A valuationallowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. At the end of 2001, the Company provided a valuation allowance for state operating losses totaling $5,858,000.

The Company also has certain deferred tax assets relating to its non-U.S. subsidiaries for which a valuation allowance has been created. These assets represent net operating loss carryforwards and depreciation netted against a deferred tax liability relating to intangibles. The net value of these assets wasapproximately $79,756,000 at the end of 2001. The Company has established a valuation allowance associated with this entire balance of $79,756,000 because it is more likely than not that this deferred tax asset will not be realized.

Deferred U.S. income taxes and foreign withholding taxes are not provided on the undistributed cumulative earnings of foreign subsidiaries because such earnings are considered to be permanently invested in those operations. The undistributed cumulative earnings of foreign subsidiaries that areconsidered to be permanently invested were approximately $611,768,000 at December 28, 2001.

11. Product Group and Geographical Information

The Company manages its business in one operating segment.Consolidated net sales by product group are as follows:

(In thousands) 2001 2000 1999Optical Networking $ 1,202,830 $ 2,153,399 $ 1,367,549Broadband Access 538,018 763,165 540,497Voice-Quality&nbsp&nbspEnhancements 131,376 194,167 267,457Services and Other 327,523 276,704 146,867Total $ 2,199,747 $ 3,387,435 $ 2,322,370



Consolidated net sales by country, based on the location of the customers, are as follows:

(In thousands) 2001 2000 1999United States $ 1,679,184 $ 2,632,457 $ 1,631,225Other Geographic Areas $ 520,563 $ 754,978 $ 691,145Total $ 2,199,747 $ 3,387,435 $ 2,322,370

Long-lived assets by country are as follows:

(In thousands) 2001 2000United States $ 727,417 $ 532,949Finland 86,657 90,483Denmark 58,690 61,189Other Geographic Areas 48,418 65,967Total $ 921,182 $ 750,588

During 2001, a single customer accounted for approximately 18.4% and another single customer accounted for approximately 10.1% of consolidated net sales. In 2000, a single customer accounted for approximately 19.1% of consolidated net sales. In 1999, a single customer accounted for approximately11.5% and another single customer accounted for approximately 11.0% of consolidated net sales.

12. Commitments

The Company and its Subsidiaries have a number of operating lease agreements primarily involving office space, buildings, and office equipment. These leases are non-cancelable and expire on various dates through 2014.As of December 28, 2001, future minimum lease commitments under non-cancelable operating leases were as follows:

(In thousands)2002 $ 15,3852003 12,2472004 6,9012005 5,2442006 3,9782007 and Thereafter 2,769Total Minimum Lease Payments $ 46,524

Rental expense for the years ended December 28, 2001, December 29, 2000 and December 31, 1999, was approximately $26,521,000, $30,808,000 and $19,671,000, respectively.

13. Earnings Per Share

(In thousands, except per-share data) 2001 2000 1999The following chart sets forth the computation of&nbsp&nbspearnings (loss) per share:

Numerator:Net earnings (loss) before cumulative effect

of change in accounting principle $ (181,976)$ 759,957 $ 549,663Cumulative effect of change in

accounting principle � (29,161) �

Net earnings (loss) $ (181,976)$ 730,796 $ 549,663Denominator:

Denominator for basic earnings (loss) pershare — weighted-average sharesoutstanding 409,569 409,425 404,872

Effect of dilutive securities:Employee stock options and awards � 8,960 12,169

Denominator for diluted earnings (loss) pershare — adjusted weighted-average sharesoutstanding and assumed conversions 409,569 418,385 417,041

Earnings (loss) per share before cumulative effectof change in accounting principle $ (0.44) $ 1.86 $ 1.36

Earnings (loss) per share before cumulative effectof change in accounting principle,assuming dilution $ (0.44) $ 1.82 $ 1.32

Cumulative effect of change in accountingprinciple per share � $ (0.07) �

Cumulative effect of change in accountingprinciple per share, assuming dilution � $ (0.07) �

Earnings (loss) per share $ (0.44) $ 1.79 $ 1.36Earnings (loss) per share, assuming dilution $ (0.44) $ 1.75 $ 1.32

14. Subsequent EventsIn January 2002, Tellabs completed its purchase of Ocular Networks, Inc., a leader in next-generation optical solutions for the metropolitan networking market, for approximately $355 million including options. Through this acquisition, Tellabs adds three new products to augment its optical networkingportfolio of digital cross-connect and transport switching systems. The new products will now be known as the Tellabs 6400 transport switching series. The Tellabs 6400 transport switching products support customer applications by extending digital cross-connect system functionality into smaller, localoffices.

Tellabs will retain the Ocular Networks location in Reston, Virginia, which will become the home of the new Tellabs Metro Networking Group. This group will be responsible for the development of the 6400 line of transport switching products.

15. Quarterly Financial Data (unaudited)Selected quarterly financial data for 2001 and 2000 was as follows:

(In thousands,except per-share

data) &nbsp

FirstQuarter

&nbsp

SecondQuarter

&nbsp

ThirdQuarter

&nbsp

FourthQuarter

&nbsp Total&nbsp &nbsp &nbsp &nbsp &nbsp

2001Net sales $772,108 $509,395 $448,215 $470,029 $2,199,747Gross profit $405,906 $46,575 $189,712 $121,006 $763,199Net earnings (loss) $122,507 $(174,702)1 $(49,474)2 $(80,307)3 $(181,976)Earnings (loss) pershare $0.30 $(0.43) $(0.12) $(0.20) $(0.44)*

Earnings (loss) pershare,

assuming dilution $0.29 $(0.43)1 $(0.12)2 $(0.20)3 $(0.44)*

2000Net sales $631,285 $785,460 $812,111 $1,158,579 $3,387,435Gross profit $332,191 $422,037 $433,384 $647,774 $1,835,386Net earnings before

cumulative effectof change

in accountingprinciple $120,5114 $157,128 $187,3275 $294,9916 $759,957Cumulative effect ofchange

in accountingprinciple $(29,161) � � � $(29,161)Net earnings $91,350 $157,128 $187,327 $294,991 $730,796Earnings per sharebefore


in accountingprinciple $0.29 $0.38 $0.46 $0.72 $1.86*

Earnings per sharebefore


in accountingprinciple,

assuming dilution $0.294 $0.38 $0.455 $0.716 $1.82*

Cumulative effect ofchange

in accountingprinciple

per share $(0.07) � � � $(0.07)Cumulative effect ofchange

in accountingprinciple $(0.07) � � � $(0.07)



per share,assuming dilutionEarnings per share $0.22 $0.38 $0.46 $0.72 $1.79*

Earnings per share,assuming dilution $0.224 $0.38 $0.455 $0.716 $1.75*

* The earnings-per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly earnings-per-share amounts does not necessarily equal the earnings per share for the year.1 Net earnings and earnings per share include $261,639 pre-tax restructuring and other charges. Pro forma net earnings and earnings per share, assuming dilution, excluding these items, net of tax, would have been $10,172 and $0.02, respectively.2 Net earnings and earnings per share include $50,291 pre-tax restructuring and other charges, a $19,392 pre-tax loss for the impairment write-down of certain preferred and equity investments and a $6,387 pre-tax gain on the sale of an equity investment. Pro forma net earnings and earnings per share, assuming dilution, excluding these items, net of tax, would havebeen $2,409 and $0.01, respectively.3 Net earnings and earnings per share include $136,719 pre-tax restructuring and other charges, a $6,437 pre-tax gain on the sale of an equity investment and a $6,162 pre-tax loss on the sale of certain preferred and equity investments. Pro forma net earnings and earnings per share, assuming dilution, excluding these items, net of tax, would have been $13,552 and$0.03, respectively.4 Net earnings and earnings per share include a $5,760 pre-tax charge for merger costs related to the acquisition of SALIX Technologies, Inc., a $19,161 pre-tax gain on the sale of stock held as an investment, and a $4,588 pre-tax gain on a distribution from one of the company's technology investments. Pro forma net earnings and earnings per share, assuming dilution,excluding these items, net of tax, would have been $79,387 and $0.19, respectively.5 Net earnings and earnings per share include a $12,102 pre-tax gain on the sale of stock held as an investment, and a $8,627 pre-tax gain on a distribution from one of the company�s technology investments. Pro forma net earnings and earnings per share, assuming dilution, excluding these items, net of tax, would have been $173,214 and $0.42, respectively.6 Net earnings and earnings per share include a $8,522 pre-tax gain on the sale of stock held as an investment. Pro forma net earnings and earnings per share, assuming dilution, excluding this item, net of tax, would have been $289,153 and $0.70, respectively.



EXHIBIT No. 21Tellabs Inc. and SubsidiariesSubsidiaries of the Registrant

Name State or Other Jurisdiction of Incorporation

Tellabs Operations, Inc. Delaware

Telecommunications Laboratories, Inc. Illinois

Telecon Acquisition Corp. Delaware

Tellabs Export, Inc. Delaware

Tellabs Japan, Inc. Delaware

Tellabs Manufacturing, Inc. Delaware

Tellabs International, Inc. Illinois

Tellabs Communications Canada Ltd. Canada

Tellabs do Brazil, Ltda. Brazil

Tellabs N.Z. Ltd. New Zealand

Tellabs H.K. Ltd. Hong Kong

Tellabs Pty. Ltd. Australia

Tellabs International de Mexico Mexico

Tellabs Asia Pacific Private Limited Singapore

Tellabs Communications International, Ltd. China

Tellabs (Thailand) Co., Ltd. Thailand

Tellabs Korea, Inc. Korea

Tellabs Malaysia Sdn Bhd Malaysia



Tellabs (V.I.), Inc. U.S. Virgin Islands

Tellabs India Private Limited India

Tellabs Holdings B.V. Netherlands

Tellabs Enterprises B.V. Netherlands

Tellabs Oy Finland

Kiinteisto Oy Mestarinkaare Finland

Kiinteisto Oy Sinimaentie 6 Finland

Tellabs (S.A.) Proprietary Ltd. South Africa

Tellabs Holdings, Ltd. Ireland

Tellabs (Ireland) Ltd. Ireland

Tellabs Ltd. Ireland

Tellabs Research Ltd. Ireland

Tellabs Communications Ireland Limited Ireland

Tellabs Communications Technologies Ireland

Tellabs EMEA Holdings, Ltd. Ireland

Tellabs AB Sweden

Tellabs SAS France

Tellabs (S.A.) (Proprietary) Limited South Africa

Tellabs Italia S.r.l. Italy

Tellabs Netherlands B.V. Netherlands

Tellabs Poland Sp. z.o.o. Poland



Tellabs GmbH Germany

Tellabs Southern Europe S.A. Spain

Tellabs Austria Vertriebs GmbH Austria

Tellabs U.K. Ltd. United Kingdom

Tellabs Communications UK Limited United Kingdom

E. Coherent Communications Systems Ltd. United Kingdom

Tellabs Denmark A/S Denmark

DSC Communications (India) Private Limited India

FIBCOM India Ltd. (40% Joint Venture)

White Oak Merger Corp. Delaware

Tellabs TG, Inc. Delaware

Tellabs Transport Group, Inc. Quebec

NetCore Systems, Inc. Delaware

Salix Technologies, Inc. Delaware

Tellabs Mexico, Inc. Delaware

Tellabs de Mexico, S.A. de C.V. Mexico



CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-45788, 33-48972,33-55487, 333-49557, 333-83509, 333-87637, 333-95135, and 333-56546) of Tellabs, Inc. of our report dated January19, 2001, with respect to the consolidated financial statements and schedule of Tellabs, Inc. included and incorporatedby reference in the Annual Report (Form 10-K) for the year ended December 29, 2000.

/s/ Ernst & Young LLP

Chicago, IllinoisMarch 23, 2001



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